Slow progress on unclear investment charges

"Another year passes and it feels like - as an industry- we've barely made any progress in simplifying fees," says Nick Hungerford, chief executive of Nutmeg.

"There is still far too little transparency for the consumer and the charges are still far too high."

Mr Hungerford takes issue with the wide number of 'hidden' fees that tend to impact investors using discretionary and advisory wealth managers, but also affect those using execution-only platforms. These include set-up charges levied by many platforms when you open an account, inactivity fees for infrequent trades and exit fees.

SCM Private founder Alan Miller claims that the complexity of fees has actually increased rather than decreased since the Retail Distribution Review (RDR), a set of UK regulatory changes aimed at improving standards of financial advice, and consumers' understanding of the cost of investing. The review resulted in the separation of fees for financial advice and funds, and has confused the charging picture further, he argues.

"There is a problem [with unclear charging] across execution-only, advisory and discretionary managers but the worst culprits by far are private wealth managers," he says. "There are too many charges, it is too confusing and the charges are too high.

"Pre-RDR there was one charge which then paid out various levels of fee so the headline charge was closer to the real number, but now you have so many different layers of fees and so many moving parts that it's practically impossible for many investors to calculate what the costs are."

However, Lee Dooley, managing director at Tilney Bestinvest, says RDR has improved transparency. "There have been a number of regulatory changes, most notably through the RDR, in the past few years to improve the transparency of fees being charged and promote healthy competition across the industry.

"We have championed these changes from the outset, updating our fee structure to reflect these changes so that the fees associated with investing and the services available, are now much clearer and easier to understand."

But even if the full list of costs, which include trading fees, rebalancing costs and set-up fees, are made clear to investors there is no clear way to compare wealth managers to each other. The fact that managers do not always list their fees in the same units (with some opting for percentages and others using pounds and pence) adds to that difficulty, too.

Mr Miller says: "Even if people can see the full list of costs and charges, without a common template where people can compare one manager to the other it is hopeless. The only way to have real transparency is for the consumer to be told the total cost and have that added up in pounds and pence in a place they can see."

Traditional discretionary managers acknowledge there is an issue with complex pricing structures, too. Magnus Wheatley, managing director at execution-only platform Charles Stanley Direct, says: "Clarity of charges is an uphill battle for the platform industry as we all operate different business models with different influences."

Taking Charles Stanley Direct as an example, he says its links with the charging structure of its parent company means it charges a separate annual administration fee for a self-invested personal pension (Sipp) on top of its annual platform fee and "a rather complex share arrangement which is capped at a maximum of £150 per year".

"I am acutely aware that we need to simplify charges and this is something we are undertaking internally at the moment," he says. "I am hoping to get a removal of the six chargeable trades in a six-month period line and simply adopt a 0.25 per cent charge capped at £150 a year. That would clear up our charges considerably and is on the table to be done in the next tax year."

Mr Wheatley says the company is also working on a new site which will display investment costs in pounds and pence.

It's not all bad...

Mr Miller also acknowledges that some progress has been made, particularly when it comes to platforms displaying ongoing charge figures (OCFs) rather than annual management charges (AMCs). The OCF figure is more inclusive than an AMC as it includes the full cost of operating the fund as well as the charge paid to the fund manager.

"Managers used to show the AMC in a big headline and in tiny print show the ongoing charge or total expense ratio, so showing the ongoing charge is an improvement," he says.

Mr Dooley adds: "We also think that with regards to fund charges the move to showing an ongoing charges figure is sensible and helpful to investors so they can more readily compare the costs charged across differing fund ranges."

Arguably, changes to platforms such as Fidelity Funds Network and Barclays Stockbrokers, due to take place later this year, could also result in a streamlining of the different charging regimes for funds, and stocks and shares. Fidelity Personal Investing currently only enables investors to deal in funds.

Barclays Stockbrokers also plans to overhaul its pricing structure before the end of the year, which could see its different pricing for funds, stocks and shares reviewed.

Be aware of these hidden charges

Nutmeg has set out a number of hidden investment charges which include the following. Although not all platforms and brokers charge these it is worth checking the small print of your agreement with your investment manager, in order to see whether or not you will incur them.

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