Top 20 Funds In Shock “Hidden Charges” Exposé

Top 20 Funds In Shock “Hidden Charges” Exposé
Underwater by Julian Cohen. Why?

Research into hidden charges across the top 20 selling funds of 2016 has shown that investors in 13 funds could have paid as much as 85 per cent more in extra fees than had previously been disclosed.

The Good News For Investors Is That Fund Managers Can No Longer Hide Charges

Are Hidden Fund Charges Really A Thing Of The Past?

Following a change in European rules early in 2018, funds managers are no longer able to combine the cost of research with trading commissions.  In addition, they must pay directly for analyst research and make the cost plain in investors' charges.

Fund managers didn’t do this willingly. 

It’s happened as a result of something called MiFID II.

What Is MiFID II?

The Markets in Financial Instruments Directive (MiFID) is the framework of European Union (EU) legislation for:

  • Investment intermediaries that provide services to clients around shares, bonds, units in collective investment schemes and derivatives (collectively known as ‘financial instruments’)
  • The organised trading of financial instruments

MiFID applied in the UK from November 2007, and was revised by MiFID II, which took effect in January 2018, to improve the functioning of financial markets in light of the financial crisis and to strengthen investor protection.  MiFID II extended the MiFID requirements in a number of areas including:

  • New market structure requirements
  • New and extended requirements in relation to transparency
  • New rules on research and inducements
  • New product governance requirements for manufacturers and distributers of MiFID ‘products’
  • Introduction of a harmonised commodity position limits regime

The Lang Cat, a financial consultancy firm, examined the 20 best selling open-ended funds of 2016.  It discovered that on average, the cost of these funds was more than 30 per cent more than previously disclosed.

The charges aren’t new.  They’ve always been there.  But before now, they didn’t need to be declared.

The result was that investors were often under the illusion they were paying much less for their funds than reality.

Funds which change the portfolio holdings more frequently will have greater transaction costs. 

This under-reporting of charges doesn’t just apply to active funds.  Included in the list were some passive funds from Vanguard and Legal & General that had failed to disclose 50 per cent and more than 80 per cent of the overall costs, as you can see from the table below.

stockmarket fund charges
Mike Barrett, consulting director at The Lang Cat, said:

No-one's charges have actually gone up.

Investors have always been paying these fees.  It is just that the fund groups now have to tell you what they are charging.

Numerous surveys over recent years have shown how people trust financial services at roughly the levels normally reserved for politicians and estate agents.  And with fund groups now saying “Oh, sorry, when we said we were charging you X, we meant a figure over a third higher”, it is not hard to understand why.

This feeling of grubbiness is compounded when you remember just how hard it has been for the industry to step up to the plate and make these changes.

This is not anything radical – all they are being asked to do is to tell people what it costs to invest with them.  It has taken EU regulation to get this out in the open, rather than transparency being a rule of thumb.

Now we’ve come this far, we also need those firms who are disclosing a zero cost to explain the basis of their assumptions.

The comments above are quotes from the full article entitled I Would Have Got Away With It Too If It Wasn’t For Those Meddling KIIDs.  A KIID is a Key Investor Information Document.

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

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Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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