Are you getting what you pay for?

This is the question that all consumers of retail financial services should be asking.

If you are paying for ongoing advice, through the product charges which generate trail commission, is your financial adviser providing an ongoing service?

If you are paying for active fund management, through slightly higher annual management charges on your investment funds, are you actually getting active fund management?

A surprisingly high number of actively managed investment funds do little more than track the benchmark index.

We refer to these funds as ‘closet trackers’; they might claim to be an actively managed fund but behave more like an index tracker fund.

Of course an index tracker fund can be accessed at a slightly lower cost than an actively managed fund.

Strip out advice and platform charges, to create a fair comparison between the two, and you might pay 0.6-0.75% a year for an actively managed fund, versus 0.1-0.4% for an index tracker.

Clearly there is a cost saving potential if you pay for what you are actually getting from your investment fund, rather than paying for what they claim to be delivering.

A new survey from SCM Private found that nearly half of UK equity funds are closet tracking the FTSE All Share index.

They referred to this finding as part of a “scandalous index cloning epidemic”, and we tend to agree.

If you are going to clone an investment index, buy an index tracker fund.

If you want active fund management which stands a chance of beating the index return, buy an active fund which has a high active share.

An academic study found that these funds with a high active share tend to outperform the index. When studies compare index trackers and active funds, they usually lump these closet trackers in with the active funds, distorting the results and giving index trackers an unfair advantage.

Whatever the area, when it comes to retail financial services you should always make sure you get what you pay for.

Do talk to us if you need to review how your portfolio is allocated and weed out any hidden closet trackers that might be lurking.

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