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Watchdog: prove you're not taking 3% of our money!

‘Arrogant and complacent’ fund managers bleeding UK pension schemes of £35 billion in covert charges a year, says man leading Financial Conduct Authority’s fee probe.

 
Watchdog: prove you're not taking 3% of our money!

‘Arrogant and complacent’ fund managers are bleeding UK pensions of £35 billion in covert charges a year the chair of the body leading the Financial Conduct Authority’s fee probe has claimed.

Chris Sier, an outspoken campaigner and Newcastle University Business School academic who has worked extensively with local government pension schemes on transparency issues, was appointed to head the FCA’s institutional disclosure working group this summer.

Speaking to the Times in his first interview in his new role, he offered a blistering take on some of the conduct issues which he believes have tarnished the industry’s reputation.

A former detective, he said that despite working for years on the issue, he had never got to the bottom of how much the average manager added to their billables in trading costs, FX commissions, custody fees and other opaque expenses.

‘I’d be surprised if it was much less than 3%,’ he told the paper.  ‘I’m willing to be proved wrong. But no one has done so yet. The FCA has found you wanting. You’re not doing yourselves any favours by resisting this.’

He said that while his background was in institutional investment, he believed it likely that retail investors faced similar levels of undisclosed fees, claiming that he had identified 16 layers of intermediated costs on the average ISA portfolio. “That’s just a simple equity Isa. It’s horrendous.’

He added that since the adoption of a transparency code two years ago, local authority pension funds have reduced the fees expenses by 0.05%.

23 comments so far. Why not have your say?

Codger

Dec 12, 2017 at 15:41

Investment fund fees and platform fees of only 1.5% will reduce the value of a pension fund by about a third if somebody saves for a pension over 40 years. Perhaps it would be better to abolish all tax relief on pension fund contributions and progressively increase the state pension to a level people can live on. At least the state would not be spending all the money on fees.

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ajay

Dec 12, 2017 at 16:09

It's about time we questioned the whole morality of paying for financial services via commissions, or as I refer to it 'rake off'.

I don't see why my fund platform provider should earn more from my investments simply because they have done well, they have done no more for me than when my portfolio was half the value. And this is true of any service that involves money. Why do foreign exchange desks get twice as much for counting out 20 dollar notes instead of the same number of 10 dollar notes? Does it cost twice as much to sell a one million pound house as it does a half million pound house? Does it cost ten times as much to buy £10,000 pound of shares as £1000 pounds of shares?

The whole of the financial industry is just raking off a percentage of our money one way or another and getting rewards which are far in excess of the value of the services they provide or the value of their work to the nation.

And let me be clear, I'm not hard up and envious and I'm pretty right of centre. But I think this whole process has an unpleasant smell about it.

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Big boy

Dec 12, 2017 at 16:45

I think it would be good if the press/media understood and explained charges/fees/cost of debt and how they are charged against capital/revenue.

It's easy to manufacture a high yield which investors rush into. Floods of money make them (Fund Management Houses)very rich. I asked an IFA how the expenses were charged on their Unit Trusts and he didn't know....How many new investors ask the question. Also do investors know how the bid and offer price is made up let alone how much is taken when investors all start selling the stocks they have piled into.Ie moving onto a bid basis as against an offer basis....assume this still happens.

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Dave Knight

Dec 12, 2017 at 18:06

@ Codger

What has this got to do with tax relief?

@ Ajay

RDR may have passed you by, so you may be interested to know that commission has not been permissible to advisers for 5 years.

and @ Big boy

Most retail clients are not interested in the minutiae of how the bid and offer prices are made up, just what the end result is in terms of an overall charge.

It is interesting to note that (according to the article) Local Authority schemes overall fees have reduced by a mere 5 hundredths of one percent, or 5p in every hundred pounds spent. BIG DEAL! And at what cost to implement this massive saving? There you find it difficult to get reliable stats as the FCA doesn't have to worry about spending other peoples money.

And instead of just whingeing that "everything is too expensive" some cost-effective, implementable, realistic and acceptable alternatives to "the way it's done" would be welcome.

But you never get that from the FCA, just an over-arching charge that "you lot cost too much". From people that have never had to run a business and worry about profit and loss, shareholders and customers.

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Alan Selwood

Dec 12, 2017 at 18:25

Suppose it was made mandatory for all financial services firms to show their mark-up, in the form of a table listing all their direct and indirect charges levied and also the underlying cost of operating the business. This table would be supplied to the FCA and also made public.

If the FCA then blocked them from trading if the mark-up was more than 20% above the average of all figures submitted, I'm sure that some quick action would result. The FCA could use the same base hurdle level each year, and after 2 or 3 years, I suspect that all providers would adjust their operations to make sure that they kept below those previous hurdle rates. If they didn't manage it, they would have to find another job.

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Codger

Dec 12, 2017 at 18:34

The government encourages people to save by providing tax relief. Then the customers lose much of the benefit by the high charges levied. So the government loses tax revenue and the fund managers get rich!

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Dave Knight

Dec 12, 2017 at 19:20

@ Alan Selwood

"Suppose it was made mandatory for all financial services firms to show their mark-up, in the form of a table listing all their direct and indirect charges levied and also the underlying cost of operating the business. This table would be supplied to the FCA and also made public."

Suppose they also did this for cars, houses, mortgages, holidays, or investment funds and anything else that was likely to attract significant money? Why stop at financial services? Because it is market sensitive and none of your business. People will pay what it is worth, and if it's not worth it, they can always go elsewhere.

"If the FCA then blocked them from trading if the mark-up was more than 20% above the average of all figures submitted"

Then, every year, as the most expensive companies/plans get removed, the average drops, and then we go into the second year with the most expensive ones also being removed, and the average drops again, and so on and so on...

Eventually, everything costs the same and everything is average.

When Rolls Royce are closed because their prices are more than 20% higher than Ford's, the job is done and the regulators are happy.

Like a lot of contributors to CityWire, you appear to know the cost of everything, but the value of nothing.

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ajay

Dec 12, 2017 at 21:53

Dave Knight

RDR, fine, yes of course I know about that. It's a start, a minor one in my opinion.

Is that your answer to the whole financial commission argument?

BTW are you the self-appointed 'educator' of this site? There's always one in every forum.

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Donald Chan

Dec 13, 2017 at 08:30

Is it time we had an up/down tick facility?

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Dave Knight

Dec 13, 2017 at 11:29

@ajay

I have no wish to be an educator except to my clients.

However, I do sometimes find myself drawn to comment on plainly ludicrous suggestions.

From your previous post I would guess that you would like to see a "flat fee" for every transaction, no matter how large or small. That has the opposite effect to that usually intended, in that larger investors get a proportionately cheaper deal and those with less to invest pay significantly more. Just think it through.

I just get the impression that some people (especially the FCA) will not be happy until everything is done for nothing.

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Anonymous 1 needed this 'off the record'

Dec 13, 2017 at 11:54

I understand the concern over charges, I am employed by an Asset Management company, we work with the IFA community and merely facilitate what charges they wish to levy to their clients. We have a maximum of 3% ( collected by the Adviser) and we only charge fees for Discretionary Management on top of what the Fund House charges to manage the collective schemes in which we invest. If the Adviser wishes not to charge the client via ourselves then he/she does not have to. Having said this somebody needs to pay for advice and I am sure the full disclosures required under MiFID 11 on client reporting will bring forth more ire on the level of charges involved, if only because they are more transparent.

Internally, we work hard to ensure our clients invest in the lowest cost share classes we can obtain from the Fund Houses. The latter are frequently reluctant to grant us access to the lowest charging share class as they have a high minimum investment which, frankly. has not moved on from 10 years ago. The industry only has itself to blame for the rise of the passives and charges as low as 0.03% for a tracker but at some stage these vehicles will no longer be the bell weathers everyone thinks they are.

The right question to ask is how do Fund Houses justify their charges when for the successful funds the AUM has risen spectacularly in the last 5 years- and then many want to add a performance fee on top which may or may not apply and who knows ( a la the new Fidelity charging arrangement) which will be ' lowest cost'

Yes this is all ' the cost of everything but the value of nothing' but whoever said this did not apply to Financial Services?

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Big boy

Dec 13, 2017 at 15:00

I note that most Retail investor are not interested in the "minutiae" but Anonymous mentions 3% for starters...£3/- per £100/- is quite a lot. Unit Trusts used to have an initial/spread of 5 to 51/2% which covered 3% to the IFA or they could split it with the client. The balance covered the market makers spread,stamp duty,Trustees and buying and selling commission. In addition you could go onto a bid or offer basis which had to be within a 8% spread. ie using 5% the offer price would be 95-100p or bid basis 92-97p The later basis is what was used when you had a net redemption. It looks to me that investors could be paying £5000.00 per £100,000.00 invested. Can DK provide some more info?? This does not include the annual charges on the FUM and hopefully some one will provide some figures which are up to date.

I am not sure it is correct that a Professional should use their names on this forum so I understand why some need to be "off the record"

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The Old Man

Dec 13, 2017 at 15:03

To make really substantial savings in fees and charges it pays to put in some time and effort and learn to be a successful investor.

Investment trusts are far better and cheaper investment vehicles than unit trusts, OEICs etc but you have to know enough to make the right choices.

Some dealing platforms are expensive and others not, some are free of annual charges altogether and the dearest are not always the best to use.

Some people prefer to use financial advisers but in my 50 years of stock market investment I have only found a minority worth their fees.

I suspect watch dogs will come and go but I wouldn't mind betting that the insurance companies, pension fund managers and bankers will all have large impressive offices in 50 years from now and there is only one source of income and that's you.

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Dave Knight

Dec 13, 2017 at 15:48

@ Big Boy

"Can DK provide some more info??"

No. I am just repeating the info in the article. 0.05% reduction in fees of pension providers to local authority pensions, which are big investors, is hardly earth-shattering.

Applying the same "savings" to the average retail investor would result in miniscule savings.

Anonymous mentions 3%, but this is the cost of advice, not the product. UT's/OEICs are now almost universally free of initial charges, and run on just the AMC, often under 1% pa. 5% bid-offer spreads or initial charges are a thing of the past.

You may be like the Old Man, who is capable of researching and making his own investment decisions, but the vast majority of the UK population do not have either the capacity nor interest in spending years learning the ins and outs of investment options, taxation, risk, access, reward and countless other criteria.

It is these people who are quite happy to pay for someone else to manage their investments for them, much as most others commenting here will quite happily pay to have someone else service their car or mend their washing machine, or re-wire their house, rather than spending months or years learning how to do it themselves.

Just don't expect those that provide the expertise and knowledge to do so for less than it costs to get a plumber.

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Big boy

Dec 13, 2017 at 17:56

DK. I am just trying to obtain the facts. I have been involved on all sides of the Investment Industry including designing and managing Products for IFAs,retail and Institutional Investors. I dont have a problem with charges (I made more than most plumbers) but do object to Investors (including IFAs) being mislead.

I see Mr Sier have been in trouble........

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ajay

Dec 13, 2017 at 18:16

I'm quite happy to pay a plumber for his expertise and knowledge, and his time. there seems to be an implied idea that financial knowledge and expertise is worth more than that of a plumber.

Be that as it may, what I would not expect from a plumber is to charge me, say, 2% of the value of my house to carry out his work!

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Dave Knight

Dec 13, 2017 at 19:44

@ ajay

You miss the point.

I would welcome any idea you have that-

A) is fair and equitable

B) is repeatable

C) is economic for the adviser and the client

D) does not penalise the smaller investor in favour of the larger

And before you say "hourly fees", that is an option already available and some clients opt for, though by no means all.

Not all clients want to pay the same way, and the more freedom there is to provide a workable option suitable for both parties the better.

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Snippyboy

Dec 14, 2017 at 11:53

lets all work for free! oh wait, I have overheads and FCA/PII to pay for....

If we dont deliver value to our clients for our fees, clients vote with their feet, whats the issue?

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ajay

Dec 15, 2017 at 16:27

Dave Knight

Dec 15, 2017 at 16:35

@ ajay

?

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Woodberry

Dec 16, 2017 at 11:04

Since retirement I manage my own investments reasonably successfully (average 10% growth p.a. over 10 years). I make my own decisions and have made a number of mistakes as well as having one very satisfying success. I now have a strategy based on 60% investment trusts spread across the world markets, 20% PIBS and fixed income and 20% EIS. I rebalance very year or so and choose a new EIS scheme each year. I would like to have an intelligent face-to-face discussion with an adviser as a reality check on what I am doing but IFAs seem to want 1% of my assets to talk to me. Am I unrealistic in hoping

to get an hour's conversation preceded by two hours study of my portfolio and strategy for £500? Would I hear anything useful?

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Donald Chan

Dec 16, 2017 at 12:22

I think they should be paying you, Woodberry.

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The Old Man

Dec 16, 2017 at 17:41

I think you are doing fine Woodberry. I doubt whether an IFA could help but there just might be a broker somewhere with some better ideas.

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