Fund charges “wildly misleading”

The total expense ratio (TER) of 43 funds in the IMA unit trust and OEIC universe is at least 1.5 per cent higher than their annual management charge (AMC), according to FE Trustnet research.

Our data shows that 10 funds have a difference greater than 2 per cent, while four have a difference greater than 2.5 per cent.

The biggest disparity occurs in HC FCM Salamanca Global Property, which has an AMC/TER difference of 3.55 per cent. No single group is responsible for a large proportion of these 43 funds however; this is an industry-wide issue that affects a number of investment houses.

While the disparity between TER and AMC is non-existent in some cases – 621 funds have a difference of less than 0.1 per cent – these 43 cases illustrate the lack of consistency between the two measures of cost. Since investment houses often publish AMC rather than TER when expressing a fund’s cost, many industry experts believe investors are being misled.

"The industry needs to be embracing transparency and openness if it is to maintain investor confidence," said Rob Gleeson, investment product consultant at FE.

"AMC is a wildly misleading figure which bears next to no resemblance to the true cost of investing in a fund. That groups are still pushing this figure is incredible. Obviously no one will want to make the first move and bump up their advertised charges – it will require action from the regulator to make this happen."

"Unfortunately TER is also imperfect; charges reporting in general needs some serious work. Hopefully post-RDR this issue will be less serious, but I doubt the problem will have been solved completely."

Bestinvest’s Adrian Lowcock, who recently hit out at the IMA for misunderstanding the true problem of fund charges, agrees that terms such as AMC and TER are needlessly misleading.

"Surely AMC should equate to the amount you pay a group for managing your fund, but this clearly isn’t the case," he said. "Even TERs don’t express the true cost of managing a fund, which is ridiculous.”

According to Lowcock, Fidelity’s call for an industry-standard charging system, which would ensure investors are aware of the total cost of owning a fund, would eradicate the inconsistencies between AMC and TER.

The IMA was unavailable for immediate comment.