The fund-management industry needs to get a grip

What are the most weasel of all weasel phrases in the financial industry? My call would be “this is the industry standard”. Roughly translated, it means “we know this is both unpleasantly greedy and mildly dishonest but everyone else does it too so yah boo sucks to you”.

A perfect demonstration of this appeared in The Sunday Times this week in yet another story about the many innovative ways we’re being ripped off by the fund-management industry. This one was about administration charges. These are not considered by fund managers to be part of the expense of managing a fund, and are thus not included in the management fee. They are instead something completely different. In some cases £93,000 a day (0.15% of assets under management or £34m a year) different. That’s the sum The Sunday Times says M&G’s Optimal Income Fund charged its investors for administration last year. It covers not very expensive sounding stuff, such as “record keeping” and sending progress reports. But the firm is also clear that if the administration doesn’t cost £93,000 a day – how could it? – “any surplus from this charge will be retained by M&G” on top of its already rapacious management fee of 1.25% a year. Funds of this size – the Optimal Fund has £18bn under management – should have much lower charges. Stunning, isn’t it?

Some readers might think that this kind of thing doesn’t matter. After all, it’s entirely possible for investors to find out roughly how much their funds cost them to own by looking at the ongoing charges figure (OCF), which adds up management fees and most of the other charges the endlessly creative staff in the sector dream up.

We disagree. The OCF doesn’t really clarify things for the inquisitive. What’s the difference between administration and operational costs? How come some managers can administrate so much more cheaply than others? Why are administration costs different to management costs? And why can’t the industry figure out a way to include one of the biggest costs of all: transaction fees?

It really is time for the fund-management industry to get a grip on its behaviour and start charging for its product in the same way as almost all other product providers do: present one simple, all-inclusive price, one that has to cover every cost of managing the fund from transaction costs (this might even encourage them to trade less!) and administration expenses to paying the fund manager.

This would be simple and transparent. It would mean that we could actually compare prices properly – something that might even push them down. And, perhaps most importantly, it would be honest. I don’t think it will happen anytime soon. Why? Because as Jupiter told The Sunday Times when questioned about their high administration charges: “this is the industry standard”.


Leave a Reply

Your email address will not be published. Required fields are marked *