Why ‘simple’ investment fees are anything but

The investment industry is littered with jargon: the use of numerous acronyms when we describe fees is particularly irritating to many – OCF, TER, AMC.

No wonder investors are confused and the Financial Conduct Authority – the investment industry ‘watchdog’ – has spent the past five years or so looking into charges and how to make them easier for people to understand and compare.

Before 2013, fees were generally shown in two ways: an annual management charge (AMC) and a total expense ratio (TER). 

The problem many investors face is getting their head round confusing fund fee jargon

Mifid 2 will require investors to see all these costs upfront before they invest – they will receive a pre-sale illustration, with all the fees added up. 

Is it just me or are we coming full-circle?

In our experience of dealing with do-it-yourself investors over the past 30 years, fees are an important consideration and investors want to be able to see clearly what they are paying for. 

However, fees are not the be all and end all. Consistency of performance after fees is what counts most, and investors are willing to pay a bit more for a good fund.

Our research also shows that there is absolutely no correlation between the cost of a fund and its performance. 

Could fees be reduced? Yes. 

Especially on some of the larger funds. But does cheap mean best? Absolutely not.

What investors don’t want is a mountain of paperwork to get through each time they make an investment, which is a real risk at the moment. 

Regulation is great but it shouldn’t get in the way of people investing. 

At a time when we are living longer and need to finance our own later life, the industry needs to be encouraging people to invest, not putting barriers in their way. 

We need to keep it simple.

To me, the easiest way of doing this would be to make the industry be consistent in which fee we all show and how we show it. 

Then comparison would be easy, not onorous.

Darius McDermott is managing director of Chelsea Financial Services 

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