“These charges are no more- they have ceased to be”




Tell me about your Charges Sir

Can’t do that …they’re hiddeen

Tell me about your hidden charges then

Don’t know what you’re talking about Sir.


Much of the problem rests with the word “discretionary”. If you read something such as the excellent http://www.ignisasset.com/cartesian/files/B482_1108_CartSinglePrice.pdf you would probably reckon the single swinging price a fair means of doing business and it potentially is.

Until a few years ago funds were not singly priced, they had two prices , a bid and an offer price. You bought at the offer price and sold at the bid and there was a 5% spread between the two. From the bid/offer spread , the fund managers paid the stamp duty and his other transactional fees and , provided he was thrifty, had some money left over for himself.

With a single price there notionally is no fee. In fact insurance companies lead you to believe that switches are “free”. This is not the case. The costs of buying and selling are still levied but the cost is at the manager’s discretion.

Much of the problem rests with the word “discretionary”. If you read something such as the excellent http://www.ignisasset.com/cartesian/files/B482_1108_CartSinglePrice.pdf you would probably reckon the single swinging price a fair means of doing business and it potentially is.

But when the definition of what a manager can charge for is as vague as “the costs and taxes associated with dealing” then you can be letting yourself in for pretty well anything!

Scrupulous managers may limit this definition but many won’t. This is where soft commissions can be paid (eg overpriced services charged to the price and earning the fund managers brownie points that accrue to the fund manager – not the investor). The problem is the investor pays, the manager benefits and there is very little that can be proved to show this ever went on.

Let’s take an easy example. Supposing I want to stay a night in a hotel and my boss agrees to pay the bill. I go to the desk and I’m told that I can have two nights for the price of one but the one night I pay for will be 50% higher than originally quoted. The 50% higher night is still within the quoted “Rack” rate and what’s more , the night I – or more rightly my boss – pays for is the night he’s agreed to sub.

What do I do? The second night is a lovely freebie but it pushes my employer’s costs up.

This is precisely the kind of moral dilemma presented to fund managers and unless there is completely scrupulous behaviour, it is the investor who pays for the “free night” and the manager who enjoys it.

Which is where you tend to hit the buffers on this kind of research as even the most detailed report and accounts won’t let you look much further.All managers will tell you they are clean but how accountable they are for this statement is another matter – perhaps there should be he financial equivalent of doping tests with the FSA paying more attention to these things but I am now too deep into regulation for my competence.

As I keep telling the researchers, this is the line of enquiry you have to follow, no-one’s going to point the figure at a colleague or even a rival – this is a clubby world but it is at this level of forensic detail that the problem and the solution will be found.

What is needed is a clear motivation to keep costs to a minimum. This motivation exists within the world of passive management because their reason for being is to provide a tracking service as close to the market as can be. High expenses solicit tracking error which is plain for all to see, underperform the market by 1% because of high transactional charges and you are toast.

So long as we have active managers who sell their services on the basis of their discretionary ability – eg their ability to beat the market, we will have active managers who will have the discretion to pass on inefficiencies to their investors through dilution levies and other additional fund expenses.

These expenses dilute the bigger the fund is but they do not go away, stamp duty is 0.55 of everything and does not get a volume discount. Similarly many transactional charges don’t get that much benefit from scale.

Tracking funds that do not need to hold all their stock all the time, can use their stock to lend to others and use the income from stock – lending to make their money. Some passive managers don’t need to charge for management – just as some newspapers don’t need to charge a cover price – they have other revenue streams.

What is worrying is that hidden charges mean people do not know and if people do not know and do not trust, they do not buy. If people do not buy or spend on funds for the future then we have a problem. Not only do we not have liquidity in the equity and bond markets, we don’t have the basis for the funding of the next generation of retirees.

I don’t reckon that “there’s a better thing and that to keep it hid”. Practically we have tried that strategy for years – since the abolition of overt bid/offer spreads in particular. The sad truth is that people demand opacity because they’ve been ripped off by the lack box whether it was called with-profits, swaps or just the common or garde managed fund.

You may say that now is the wrong time to open up the box and let Pandora’s winds blow free, what with millions being frog-boiled into auto-enrolment. That’s to take a pretty poor view on a nation’s intelligence. The time to do the right thing is now and frankly if we let things carry on without cleaning up the fund management industry, we would be having this conversation in a couple of years with the usual redress problems attaching.

So I’m with Which and the Labour Party and with the RSA and anyone else who says, now is the time to get to grips with fund management charges, make fund governance bite and get some confidence back into investing. If we can’t or won’t or simply don’t then it will be the worse for us all.

The whole fund managment industry works on factional advantages of this kind where 1bp being quite a major unit of currency- notheless, in nominal terms it all adds up.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in Bankers, dc pensions, FSA and tagged , , , , , , , . Bookmark the permalink.

4 Responses to “These charges are no more- they have ceased to be”

  1. Mike Atkin says:

    Sir, you have crystallised my thoughts. Henry Tapper for Prime Minister or Pensions Minister at least. Respect.

  2. ginanmiller says:

    I whole heartedly agree with Henry.  We have been doing as much as we can for the past three years to effect change but the more voices that join together the louder the message will be to the self interested, fraudulent City that has completely forgotten the human impact of what they do.

    Gina Miller

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