The scandal of hidden charges

jamesd

Right. Just like savings accounts, unit trusts report their performance after all costs but in addition they report some of the costs.

Rollinghome

jamesd wrote: »

Right. Just like savings accounts, unit trusts report their performance after all costs but in addition they report some of the costs.

The very obvious differerence is that the saver knows in advance what the interest on his savings will be. If the interest rates are to change then he will be notified and have the option of going elsewhere.

The investor in a unit trust does not know in advance what the return will be. That will depend on, among other things, charges made by the managers. He should therefore as far as possible be accurately told what those charges and costs will be.

If someone gives a manager his money to invest it seems reasonable for him to be told how much is actually being invested and how much is going elsewhere.

dunstonh

Could you please explain that bit about ordinary savings accounts, dunstonh? I don't understand - I put £100 in a savings account which advertises a 2% interest rate, and after a year I get £102.

EDIT: Oh, I see - you mean I could have had £103, or 3%, if they hadn't already taken off the £1/1% charges they incurred. Right?

Yes. Thats effectively it.

Savings accounts have what is known as a net interest margin. This is typically around the 1.3% mark. It tends to drop when banks try to attract deposits and it increases when they dont. Sometimes as high as 3%.

The difference is that with these that charge is implicit. You dont know what they are charging. With investment funds you do know what they are charging.

So, putting money into cash over 40 years will see a similar level of charges as putting it into funds. One you see, one you dont.

purch

So basically the argument is;

Fund makes 15%......Trading costs were 5%, so the Fund would have made 20% without those Trading Costs...................except, without those additional Trading Costs it would have only made 10%.

And thats bad for the Investor :rolleyes:

sabretoothtigger

I dont mind performance fees that are only taken from profits not the original capital. I think thats only the case when those fees are like 20% though
People can just opt for stakeholder pension and the expenses are capped at 1% then I think

dunstonh

People can just opt for stakeholder pension and the expenses are capped at 1% then I think

And many of the pension providers have equalised the AMC and TER when using pension funds.

sabretoothtigger

Not really heard of amc much, asset management costs I presume. Does that mean the total deductions would be no more then 1%

Rollinghome

Another cost of unit trusts investors should be aware of is the use of "spreads".

A good example is the L&G High Income. Look at the details here http://www.h-l.co.uk/funds/fund_performance/sedol/0195616 and you'll see the price today is shown as Buy 84.18p, Sell 84.18p. So you might assume there's no front-end or exit costs.

But look more closely at the chart and you'll see that the price zig-zags up and down by around 5% every couple of days. That's not due to changes in the value of the underlying assets but because L&G move the price up and down at their discretion depending on whether there's more buyer or more sellers.

So buy today at 84.14p and the chances are that if you wanted to sell tomorrow you won't get 84.14p but around 5% less. And you won't know the price you'll get until after the order has been placed. Similarly, if an order is placed at 79.50p tomorrow you might be charged 5% more when the order goes through. Forward pricing means L&G can decide the price after they get the buy or sell order.

There's nothing about it in the Key Features on the H-L site. To find out about it you'll need to dig deep into the L&G 13 page terms and conditions - if you can find them.

The average total return on UK Corporate Bond unit trusts over the last 5 years has been around just 12% or so ( about a third of the return you could have got from good savings accounts) so losing another 5% could be a bit tough. That is on top of other charges for buying that an intermediary might make.

OK, it might be that more experienced investors are aware of these costs but bit of an unwelcome trap for new investors. I think the point here is that there should always be total transparency and the full costs should be right up front in the Key Features.

EdInvestor

The only way to avoid these hidden costs is to buy the assets (shares,corporate bonds,gilts) directly.That way you will pay the broker commission and the stamp duty upfront and then usually nothing else as long as you hold the assets, apart from whatever annual fee the broker charges to hold your portfolio.Dividends are credited free.Put interest paying assets like gilts (of shares if a high rate taxpayer) into an ISA to avoid income tax.

After the first year your charges diminishe to virtually zero if you are a long term buy and hold investor.:)

Traders, of course, can stack up considerable fees. But at least it's you making the buy/sell/spend money decisions, not some anonymous fund manager who buys and sells at will and isn't even required to tell you he's doing it and how much its costing you.

Note there is no evidence that trading makes additional profits rather than just holding assets.The transaction costs can easily wipe out extra profit (if any).

EdInvestor

http://www.thisismoney.co.uk/investing/article.html?in_article_id=491865&in_page_id=166


Daily Mail starts campaign to force providers to reveal hidden charges.