When most of us want to earn more money we have to work harder or more productively. And in these austere times even that might not work. But for fund managers it’s a lot easier, they just hike their fees - usually with little justification..
I first covered this topic on the site a year ago, but a couple of announcements this week have promoted a re-visit.
There are plenty of past examples where fund managers have raised fees for no other reason than it makes them more money.
The most obvious that springs to mind is Invesco Perpetual raising the annual charge on several funds, including Neil Woodford’s High Income fund, from 1.25% to 1.50% in June 2004 - boosting revenue by over £13 million a year since then. Their argument for doing so at the time? I seem to remember it was something like "well, most others charge 1.5%, so we're 'harmonising' our charges with the market." I'd better not print what I thought of this at the time, but let's just say 4 letters would suffice...
Moving swiftly on, Henderson and Standard Life Investments have both announced fee increases this week that prompt me to use those same 4 letters. Standard Life Investments, who deserve much credit for turning a lacklustre insurance company arm into a decent investment house, will be raising the annual management charge on 7 of its funds. The highest profile of these is the £1.2 billion UK Smaller Companies fund run by Harry Nimmo, which will see the annual charge rise from 1.5% to 1.6%. In total I reckon these increases will make Standard Life Investments an extra £2.3 million a year based on current fund sizes.
Their reason for doing so? The official quote is 'At Standard Life we conduct regular reviews of our products to ensure our fund charges remain competitive with the market...'. So hiking charges makes them more competitive? Standard Life is obviously on another planet to the rest of us!
Not to be outdone, fund giant Henderson, which recently bought Gartmore, has said fund administration charges (i.e. those charges on top of the annual management charge which make up the total expense ratio (TER)) on Gartmore funds will be brought in line with Henderson funds. The upshot is that the majority of Gartmore funds will see their TERs rise, by as much as 0.1% or more. I've yet to see the exact changes, by I wouldn't be surprised if they end up costing investors an extra £4m or more a year.
Quite how running more funds increases costs is beyond me, hasn't Henderson heard of economies of scale?
And then there's performance fees
If you buy an absolute return fund, chances are the manager will charge you the standard 1.5% a year plus a performance fee, in some cases 20% of all positive returns. So if the manager does a bad job they take home the usual fee and if they do an ok or good job it'll be a lot more.
Performance fees are fine where they ensure the manager shares risk with investors, i.e. their income is higher than usual if they do well and less than usual if they perform poorly. But fund managers don't seem to like doing anything that risks them earning less money. A few years ago (when at Bestinvest) I did try persuading a few fund groups to introduce fair performance fees along these lines, I'd have stood a greater chance of raising the dead.
It's obvious the concept of fairness is lost on most of the fund management industry and that they only care about one group of people - themselves.
What should we, as customers, do?
My gut answer is boycott greedy managers who don't treat customers fairly. But in practice, it's not that simple.
I still hold Invesco Perpetual High Income, despite my disgust at the fee increase mentioned above. Why? because I believe Neil Woodford will make me more money long term than a tracker fund. I also hold Standard Life Investments UK Smaller Companies. I'm sorely tempted to sell in protest, but Harry Nimmo is a great manager who's probably worth 1.6% a year if he continues outperforming his peers.
The trouble is, unless we stand up to fund managers by moving money elsewhere when they hike charges or introduce greedy performance fees, they'll continue to walk all over us.
So what is the answer? Should consumers try to band together and regain some power over fund groups? Or should we all focus on bottom line returns and be relaxed about charges? Please share your thoughts below...
Read this article at http://www.candidmoney.com/articles/article236.aspx
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