Hidden investment costs are "a national scandal"

Investment chart and money

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'.

Damning conclusion

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."

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I challenged the performance of my endowment and asked the company to provide me with the costs. They did so but were cagey about some detail. That aside, I could see immediately that the main reason for the poor performance of the fund (coming in two thirds of its 'promised' value after 25 years) were the crippling charges. I wrote to the financial ombudsman but, in short, they were unable to help.
Daylight robbery? I think so. The fund charges were just a cash cow it seems to me. Had I paid more into the endowment to help it reach its intended target, the charges would have increased proportionally, making them even more money on a product that was not fit for my purpose. 

@mattyniven Not for the first time, I am appalled by the attitude of the FOS. Doubtless, they will refer to "buyer beware" or some such rubbish but how can we compare costs when they are invisible? It is extraordinary that you should have to write to the company (as I have had to do) when details should be available at the click of a button. Perhaps the FOS should investigate the fairness of the original contracts, which might call into question their legality. Is there a campaign somewhere I can sign?!