Miller blasts “scandalous” fund charges system

The charging system for UK funds is so confusing that even the fund managers themselves don’t always understand the true cost to investors, according to SCM Private's Alan Miller.

Miller says this confusion is unfair on consumers and is harming trust in the industry. He is particularly critical of the total expense ratio (TER), which he does not believe expresses the true cost of an investment.

"The TER is a complete and utter nonsense," he said. "Many don’t realise that it doesn’t include dealing charges and the cost of investing in things like ETFs. So the total expense ratio isn’t a total figure at all, there’s a whole host of extras not included, so you can’t compare one fund with another."

“We had a roundtable with professional investors recently, and these people are supposed to be experts, and some of them said they didn’t completely understand the charging system in their own fund.”

"In a way it is scandalous there has to even be a debate about whether or not clients should be able to know in simple language about how much they are paying and where their money is invested."

SCM has recently initiated the True and Fair Campaign, which calls for all funds to present a single, all-encompassing figure that represents the true cost of investing in a fund.

"This all started when we set up SCM and wanted to compare our charges with those of other fund houses, and we didn’t realise how difficult it was to look at one easy number with everything included," he explained.

The True and Fair Campaign is also calling for greater transparency in the underlying holdings of funds, which would bring them in line with the minimum standards required in the US. Miller says that typically private investors can’t see 40 per cent of what a fund is invested in until the annual report is published, and he believes this lack of transparency has been a major contributor to some of the largest financial scandals of the past 10 years.

He commented: "Arch Cru is the best example of this. If people knew the underlying holdings of the investment and that 25 per cent was in an unquoted Greek shipping company, it would have put a lot of people off from investing in it and they wouldn’t have taken on face level the IMA sector classification of the fund being 'cautious balanced', when evidently it was neither cautious or balanced."

"In the modern age of the internet, our clients should be able to see exactly what they hold instead of seeing the top-10 holdings and that’s it, and that’s something they’ve had in the States since 2004."

Not everyone appears to be convinced by the campaign; Hargeaves Lansdown’s Tom McPhail said it was a cheap PR trick on behalf of SCM. Miller is bemused by this criticism however.

"I recently saw an article by [Mark] Dampier – he didn’t actually mention us by name, but everything he said seemed to be exactly what we were asking for; that is that there should be all the charges by one figure, so if Hargreaves are saying it’s a cheap marketing trick it seems to be one they are now promoting."

"Ironically Hargreaves comes out pretty well when you compare charges, so I think it would be in their interest that we have a system whereby we can judge one platform against the other."

SCM estimates its turnover and cost of dealing when presenting the charges associated with its funds.