Savers are unwittingly losing thousands of pounds because hidden charges undermine their investments, one of Britain’s biggest financial companies has admitted.
Fidelity International has become the first big City institution to say publicly that investors should be warned about a whole range of hard-to-spot fees when putting money in stockmarket funds.
The company, which invests billions of pounds for more than 660,000 British customers, told The Daily Telegraph that the headline annual fee on one of its popular funds was only a third of the actual cost. As a result, the typical expense of an Individual Savings Account is hundreds of pounds more than most consumers realise, and thousands of pounds more for larger investments.
Fidelity is calling on the industry to publish “simple, transparent” fees that will show the “on the road” cost of different funds, rather than the far lower annual management charge, which is all that is disclosed by most companies.
“Fees reduce the value of your investments so everyone should be clear about what they are paying and what they are getting in return,” the company said in a statement.
The admission follows an investigation by The Daily Telegraph last year which found that £7.3 billion was being “skimmed off” annually by City bankers and fund managers in hidden fees.
Regulators are growing increasingly alarmed and the Financial Services Authority is considering insisting that investment products be “pre-approved” before going on sale.
Fidelity compared the current situation to “no frills airlines” which charge passengers extra for tax, airport levies and checking in baggage. Airlines now have to disclose the total cost before a customer pays.
The company disclosed that its popular UK index fund, which is its cheapest, has a management charge of 0.1 per cent – but that the actual cost to savers was 0.3 per cent. If a consumer invested £10,680 in Fidelity’s Moneybuilder UK Index Fund through an ISA, the charges over 10 years would be £630. Although an apparently small sum is levied, the compound impact over time is dramatic.
It has not published similar figures for its full range of funds. Many have far higher advertised annual fees and the impact of hidden charges will be even higher.
Gary Shaughnessy, a managing director at Fidelity, said that the whole industry received feedback warning that customers found it difficult to compare products.
Fidelity analysed various funds invested in ISAs and found that the costs could be significantly higher than the annual management charge and “total expense ratio” advertised by the companies involved. “You should be able to easily compare them,” said Mr Shaughnessy.
Fidelity only analysed cheap computer-run funds, which track the stock market and are not handled by expensive fund managers.
“When buying a fund, even one as apparently cheap and simple as an index-tracker, investors need to be aware of the total ‘on the road’ cost of buying and owning it,” said Fidelity’s statement. “The headline annual management charge is just one element of this total cost.” In several examples, “headline” charges advertised were only available to those investing six-figure sums. Last year The Daily Telegraph disclosed that Britain’s 8 million savers lost an average of £800 a year to hidden levies.
Alan Miller, a former senior fund manager at New Star, one of the biggest investment firms, and co-founder of SCM Private, said that investors were still being “misled”.
“The big company fees have not come down and transparency is as bad as it has ever been, but they are starting to realise that investors will vote with their feet and bypass the whole system. Investors have been taken for a ride for years,” Mr Miller said.
He called the current fees structure “a total and utter nonsense”.
“There are so many extra fees that in terms of transparency, the current system is as misleading as you can get.”
Fidelity is among the most influential blue chip investors in the world. It owns 2.2 per cent of Lloyds and sizeable stakes in all the other quoted UK banks.
Research compiled by the FSA and leading data analysts suggested that investors could lose 3 per cent of their investment each year in charges and fees, which can have a dramatic effect over a long period.
The effect of hidden charges has been exacerbated by low stock market returns over several years.
Regulators are becoming increasingly concerned about the quality of advice being offered to consumers investing in the stock market.
This week, the FSA warned that it had identified “significant, widespread failings” that could pose a risk to customers of wealth management firms.
The FSA said that a sample of 16 firms found that 14 were “a high or medium-high risk of detriment to their customers”, through offering products that were likely to be unsuitable for the clients involved.
Source www.telegraph.co.uk 17/06/2011