Investment Fund Charges Are A Scandal

There is a famous quote that goes along similar lines to;

Of course the reason there's nothing left at the end is because each 'entity' takes their fee, or perhaps 'legally skims' would be a better phrase to use in many cases.

And there is no better example of this quote than in the Fund Management business where most UK funds levy an absolutely unbelievable 5% charge or load on new money invested. Invest £10,000 and at the end of business on day 1 your investment becomes £9,500!

Charging 5% might not be so bad if the funds actually provided superior performance but it's a well know fact that over 75% of investment funds under-perform their benchmark indexes. If you pay the 5% you're therefore being charged a significant amount of money for a sub-standard service.

The blame doesn't really lie with them (after all most companies would charge high fees if they could get away with it without losing clients) but with their investors who don't realise that the first business objective of most financial institutions is to line their pockets before their clients. But thanks to the internet fund investors now have a chance of fighting back by using Fund Supermarkets which are basically businesses/websites that offer heavily discounted load fees on a wide selection of investment funds.

Two Types Of Funds

At present there are really only two types of stockmarket funds, Index Trackers and actively managed funds

1 - Tracker Funds

• Tracker funds which simply track an underlying index such as the FTSE 100 normally levying very small charges
• Their mechanism is simple. The fund buys all the stocks within the index it wants to track say the FTSE 100, and in their relevant weightings so the fund's holding in Vodafone would be far larger than in Hanson
• Tracker Funds have attracted billions in funds over the last several years for a few reasons;

Investors have found that it's hard to beat the index with traditional funds so why not throw in the towel and just track the index

Fees are normally anywhere between 0.2% - 1%

In fact if a fund charges over 1% then this is very cheeky because theoretically tracker funds from different fund management companies should produce exactly the same results (with just a small variance)

So it's really an impossible endeavour to have 1 tracker fund outperforming another

2 - Actively Managed Funds

• A fund manager physically picks the stocks and amounts to invest in
• Many of these funds though can be labelled 'closet trackers' because most of their heavy holdings are in the largest FTSE 100 constituents
• As most funds performance is based against the FTSE 100 or the All Share Index it often doesn't pay for the fund manager to go out on a limb with the investment decision
• Most actively managed funds are also pretty much fully invested all the time because they can't afford to miss any rally in the stockmarket - this is the biggest no-no in all of fund management
• Special situation funds are different though because they normally look for value and aren't matched against the All Share, so called absolute returns versus looking for relative returns

Links

• Top 10 Fund Managers
• Top 10 Investment Trusts
• Fund Management companies
• Investment Trusts
• Unit Trusts & OEICS

Beware Of Financial Advice Pushing Actively Managed Funds

Face facts, tracker funds are not that good for business because they don't levy outrageous charges. So beware when financial advisors or other 'experts' try to push you into an actively managed fund with 'the right stock picking strategy they can easily outperform the market' kind of talk. The real reason you're perhaps advised not to pick a tracker fund will likely have its foundations in the amount of commission paid to the advisor.

So What Are Fund Supermarkets & How Do They Work?

Fund Supermarkets are basically websites where you can buy hundreds of different investment funds without the ridiculous loads that you'd be charged if you bought the fund directly from the manager, or via an IFA.

There are still normally load charges to pay but they're discounted by between 1%-4%, and with some funds they are waived completely. Note that yearly management fees are still levied at the same rate, namely between 0.5%-2% per annum.

List of Fund Supermarkets

The ISA Angle

Fund Supermarkets should be seriously considered as the vehicle of choice for ISA stockmarket investors because they offer far more flexibility as to where money is invested.

At present if you invest say £7,000 in an ISA you are only allowed to do so with one manager but if you use a fund supermarket it can legally act as your manager. You can therefore should you wish invest £1,000 in 7 different funds. This therefore offers investors far greater flexibility and flexibility is always an asset in this game.

If you have ISAs already invested with other firms you can often transfer them into a fund supermarket without having to cash them in so avoiding capital-gains tax, but make sure you watch any transfer charges involved as they're not uniform from provider to provider.

Summary

Fund Supermarkets are not a new concept, they've been in use in America for some time. They do however offer a way for investors who know what they're doing and what they want to invest in to bypass the crazy fees that fund managers at are so adept at charging.

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