IMA: Hidden charges are a myth

The impact of "hidden" trading costs on the performance of funds has been hugely exaggerated, according to research by the Investment Management Association (IMA).

The group says the tarnished reputation of investment groups that don’t include transactional costs in their charges is completely unwarranted.

In a study of 129 funds in the UK All Companies sector, the IMA found that actively managed funds have average transaction costs of 0.31 per cent, while passive funds have an extra charge of 0.06 per cent.

The IMA says the study proves that the cost of an actively managed fund, in TER terms, is outweighed by the difference between the returns they provide relative to their benchmark when compared with passively managed funds.

Commenting on the study, Richard Saunders, chief executive of the IMA, said: "People need to save for the long term. They do not need to be scared off by false stories that if they do so they will be ripped off by the industry."

"The IMA’s figures demonstrate clearly that so-called hidden charges, which cost investors billions a year, are a complete myth. If the accusation were true, it would show up in the net returns achieved by investors. But there is no sign of it. The accusations of hidden charges do not stand up."

"Moreover, while some commentators claim they are not disclosed to investors, these costs are readily available in fund literature and investment fund regulation requires their disclosure," another spokesperson added.

The study has done little to win over sceptical IFAs, however, who believe the IMA has done nothing to clear up the real issue of hidden charges.

"I think the IMA has completely missed the point here," said Adrian Lowcock, senior adviser at Bestinvest. "The issue here is not whether the charges are extortionate, but why charges aren’t more transparent."

"From an investor’s point of view, it is important that they understand exactly what they’re paying for. If certain charges aren’t included in the TER – which is supposed to be the total cost of ownership – this is impossible."

While a spokesperson for the IMA said it is impossible to include the transactional costs in the TER, as the manager doesn’t know how many trades they will make in a year, Lowcock says a set level would be a far better option than hiding them from the TER.

"If the manager is forced to make a load of changes to their portfolio, surely it’s their problem," he added.

Kerry Nelson, managing director of Nexus IFA, is of a similar opinion.

"Until hidden charges are no longer hidden, I don’t see anything being resolved," she said. "If anything, by publishing this explanation, the IMA has proven how needlessly complicated the system is."