It makes sense to gain as wide a savings range as possible, share risks and secure a professional stock picking manager by purchasing through a fund. Such a collective should bring stock market and related expenses down.
Yet there are some nasty surprises even for those who take the trouble to read the small print.
Many managers are not declaring ‘performance’ fees when the paperwork shows total costs. Brokers and knowledgeable investors alike look out for the ‘total expense ratio’ (TER for short) to show the yearly expenses incurred and often make fund comparisons using such criteria.
The TER should be all-inclusive. Not only will the figure embrace the management fee but any commission and regulatory costs in buying and selling. It should be comprehensive so that both the prospective and actual investor know the drag on performance.
If the manager is under a results-related contract, such a cost should not be omitted but form a key element in the TER.
Yet frequently the holding platform where brokers lodge an investment – in place of the paper contract notes of yesteryear – give quite different expense information. A saver can be totally misled and end up paying almost six times the rate expected on a unit trust or open-ended investment company.
The fund manager of CF Octopus Absolute UK Equity says total expenses amount to 9.55 per cent but Hargreaves Lansdown, a discount broker, quotes just 1.69 per cent. Fidelity, not only a fund manager but also a platform provider, says the fee is 2.81 per cent.
The disparity is because the far lower rates exclude performance earnings which amount to 20 per cent. Of course, one problem is that payment by results refers to recognition of past performance and such costs will not necessarily be paid in the future. In addition, platforms are inconsistent in the timing for their calculations.
The safest way to see the true total expenses is to read the specific fund statement issued by each provider and often available through a broker.
From next month, new EU regulations will force open-ended investment collectives to provide savers with key information which must reveal the total expenses. It is long overdue.