Hidden investment costs are "a national scandal"
Pension savers and investors are being "exploited" as part of a "national scandal" that sees investment costs concealed, according to a leading campaigner.
People investing in funds directly or through their pensions and stocks and shares Isas have little idea of the true costs of doing so, research by the Financial Services Consumer Panel (FSCP) has confirmed.
Commonly cited measures such as the annual management charge (AMC) may account for just a quarter of the true costs investors really face "as many of the charges are deducted directly from the fund and remain hidden", it said in its latest discussion paper.
The panel points out that this is a problem that has serious consequences for investors, citing the example previously given by the Department of Work and Pensions that an AMC of 1.5% a year reduces a final pension pot by 22% after 40 years due to lost compound growth potential.
The panel's own research found that "the full costs borne by savers are simply not known" with the main reasons "simply that many costs are not properly measured or declared".
It added "even fund managers frequently do not appear to know" – based on its research that found around two-thirds of investment managers could not provide information on transaction costs.
The FSCP is calling for investment managers to be required to quote a single and comprehensive annual charge, including estimates of forward costs such as transaction charges.
"All other costs, currently deducted by the investment manager directly from the fund, would be borne by the investment management firm. This would enable consumers to compare different firms' charges, and also act as a powerful incentive on firms to improve efficiency," it added.
It also suggested investment managers could have a strengthened legal obligation to put the interests of their customers first, known as 'the fiduciary duty'.
Gina Miller, founder of SCM Direct and the True and Fair Campaign – which is calling for simpler cost disclosure - said: "Exploitation of pension savers and investors is a national scandal and this report exposes the depths of the scandal.
"The damning conclusion of this report that 'the evidence reveals a market characterised by a weak demand side that is rapidly growing numerically, and a powerful industry in which misaligned incentives are systemic and which enjoys, largely unchallenged, the potential to exploit consumer behaviour, product structure complexity and the lack of cost transparency' should act as a wake-up shout, not call, for all political parties, government, regulators and the industry."
Sue Lewis, chair of the panel, added: "People are depending more and more on investment to deliver their long-term financial wellbeing, especially in the light of the recent pension reforms. It is completely unacceptable that consumers do not know what firms are charging them to manage money on their behalf, and cannot compare different offers. While we recognise that the industry is working to improve disclosure, this does not go far enough."
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.