The rising cost of investment funds

New research from funds data provider Lipper has found that more than 150 funds have increased their annual management charges over the past decade.

The research found that 156 funds have increased their charges by an average of 30 basis points.

This has resulted in fee increases for 15% of the total funds available to UK investors during this time.

The annual management charge for an actively managed investment fund typically covers three separate costs.

From a typical 1.5% annual management charge, 0.75% will be retained by the fund manager, 0.5% will be paid to the adviser and 0.25% will cover the cost of the fund platform or administration.

In cases where an investor purchases a fund directly from a fund manager at retail prices, half of the annual management charge is often retained by the fund management group as additional profit, resulting in no cost saving for the investor.

With greater remuneration transparency being introduced to the retail financial services sector from the end of next year, we expect to see greater scrutiny of fund costs.

The rising popularity of lower cost ‘passive’ investment funds should also help to drive down fund management costs. However, it is important to remember that you cannot compare passive and active fund charges on a like for like basis, as passive funds do not include adviser or platform costs in their annual management charges.

Photo credit: Flickr/JMC Photos