The investment managing industry is taking £18.5 billion out of the pensions and investment industry via 'hidden' charges, claims a damning report from wealth manager SCM Private's True and Fair campaign.

The campaign hopes to get a standard adopted by investment management companies who offer full transparency, in the same way as chocolate bars advertise themselves to be fair trade.

A scathing report found that 63% of people would invest more if there were greater transparency in the investment industry. With defined contribution (DC) pensions placing investment responsibility on savers, that finding could concern many in the developing DC industry as they look to get people saving more.

While defined benefit (DB) pension trustees have a finite amount they want to invest, lack of transparency is a concern for trustees who manage a pension fund's cost budget. 

The report claims UK investment management fees are the fourth highest of 18 countries that dominate the global fund management industry.

The report alleges that the use of 'hidden' charges allows British funds to make their fees look unrealistically competitive despite this high cost on international comparisons. 68% of large retail funds analysed by SCM advertised the same headline Annual Management Fee, and can supposedly therefore hide extra cost differences via transaction costs not published on return statements.

Gina Miller, one of the campaign's co-founders, told Pension Funds Insider that value investment funds with any investing style have nothing to fear from greater fee transparency.

Miller said that if the industry did adopt the standard she proposes, "we believe it will lead to much greater polarisation of fees between those that can justify higher fees, through a different approach or track record, and the low cost index providers.  It is the current 'mediocrity' in the middle of high fee, closet index-tracking, poorly performing funds that will face the problems."    

Get it on the net

Miller reckons that savers and trustees could see the true cost of investment funds if managers were forced to submit a full quarterly online breakdown of assets held (including indirect assets like collateral).

She praises the regulatory regime in the US for forcing online disclosure, with the Securities and Exchange Commission (SEC) now running a price comparison website for the investment industry. She praises the US for having a stronger "culture of freedom of information" and says it helps that many Americans manage their own pension portfolios.

Miller holds no punches though as far as UK regulators are concerned, saying "sadly, the Financial Services Authority (FSA) seems to just listen to a self-interested trade lobbying association, and then delegate key investment powers to them,  which is a total derision of their regulatory duties". 

"The FSA has not even begun to view fees in terms of the consumer.  Most fees and charges (apart from dealing costs) are revealed somewhere, but currently there is no all-encompassing measure and often a consumer has to look in many different documents and make complicated calculations to calculate their own cost. 

"It is shameful that the FSA has allowed a system to operate in which many fund managers are allowed to advertise simply their annual management charge."

Miller dismisses the Total Expense Ratio that the FSA promotes as a transparent fee indicator as "totally misleading, which everyone in the industry now realises is not a total at all."

Absolutely misleading?

After scathing the FSA, Miller turned her attention to the Investment Management Association (IMA), the trade body of the investment industry. The IMA are accused of "resolutely attempting to defend the indefensible" by arguing against the need to categorise every last investment management cost to investors.

The way the IMA exercises its responsibilities for labelling investment funds has also attracted criticism from the True and Fair Campaign. The £21 billion market in absolute return funds is flagged as a potential mis-selling scandal, and the IMA is blamed for allowing its labelling regime to seemingly promise 'impossible' guaranteed returns in a way that a senior Aon Hewitt consultant recently told Pension Funds Insider is "unfortunate".

Total UK pension investments in absolute return funds have increased steadily in recent years. A National Association of Pension Funds survey indicates that hedge fund investing (which includes absolute return) rose from 1.8% of all UK pension assets in 2009 to 4.1% in 2011 as pension funds look for good return prospects with minimum risk, a combination some see as too good to be true.

Miller told Pension Funds Insider that "The IMA has proved itself repeatedly inept at labelling funds and many of the largest financial scandals have centred on mis-labelling by the IMA.  Like it or not, many investors judge funds on their labels and as such it is our view that this important task should be undertaken independently and professionally."  

Incorrect and unfair

IMA Chief Executive Richard Saunders said that the new True and Fair report "raises a number of issues which are already the subject of very detailed EU regulation arrived at after extensive consultation."

Earlier in the month Saunders called fears about hidden charges "a complete myth". The IMA published data claiming while transaction costs are not always clear, they are "more than covered by the investment returns from active managers".

Jane Lowe, IMA markets director meanwhile recently revealed a number of reservations on the absolute return sector, which they are subjecting to a review that will be published in six months.

Lowe said that the absolute return sector is currently given an 'immature' status, meaning they do not authorise comparisons within the sector. She added that some funds in the sector fit "into the definition rather than the definition fitting around them. This is not ideal in our view."

The FSA did not respond when asked for comment on Miller's claims.

dbillingham@wilmington.co.uk