When we query the high charges levied by our fund managers, we are informed this pays for scores of their minions to scurry around, finding the best investment opportunities for us to take advantage of.
So why is it then that, without any of this expertise on tap, hundreds of independent financial advisers set themselves up as so-called "broker fund" managers, creating special funds for their clients to invest in - who then pay double the charges levied by traditional life insurance and unit trust companies?
The generally unreported problem of broker funds hit the headlines last week after the Personal Investment Authority, the financial services regulator, issued a report in which it ordered a clean-up of an industry which supposedly looks after pounds 2bn of investors' money.
More than 130,000 savers have placed their money in some 1,300 broker funds, either life funds or unit trusts, specially created by advisers and "badged" in their name.
The aim of these funds is, theoretically, to create a highly individual investment vehicle which meets the needs of specific clients. This involves picking various funds from a selection on offer from a particular fund manager, whether country or region-specific, risk-averse or safe, income- generating or growth-oriented, and packaging it for the client.
The snag is the fund manager will already be levying the ordinary management fees, usually 1 to 1.5 per cent a year. So how does the adviser live? He or she charges an additional premium, perhaps another 1 per cent, for the privilege of looking after the client's money in this way.
All would be fine if, as a result of the exceptional insight shown by the adviser into his or her clients' needs, the careful selection of funds delivered the exceptional performance which they have the right to expect.
In fact, the opposite is the case. As PIA researchers found, between January 1990 and November 1996 life funds grew by an average of 7.3 per cent compound per year. Equivalent broker funds grew by 6.1 per cent annually.
"A general observation can be made that on average the underperformance against the index is approximately equal to additional management fee withdrawn from the funds, but that a number of funds have at least matched their chosen index," the PIA reports.
Running such expensive funds often helps prop up IFA firms that offer them. The PIA reports broker funds provide 25 per cent or more of the annual income for almost 20 per cent of IFAs that offer them.
Amanda Davidson, a partner at Holden Meehan, a London firm of IFAs which refuses to have anything to do with broker funds, explains the commercial imperative behind them - for financial advisers.
"Let's face it, they can provide quite a nice little pension at retirement," she observes drily. "If you invest several millions of your clients' money in broker funds out of which you receive a management charge, the moment you stop work you can sell off the funds to another adviser for a lump sum."
Ms Davidson adds: "I admit to being terribly biased against them. But these things have extremely high charges. Many of them are life company investments, which incur underlying taxation of about 19 per cent, that cannot be reclaimed.
"Nor is there much special in most of the unit trust selections chosen in these broker funds. I do not believe the extra charges are justified by performances. It seems to me as if sometimes these funds are set up to benefit brokers more than their clients."
Roddy Kohn, an adviser at Kohn Cougar, in Bristol, who also has no truck with broker bonds, agrees. But he adds: "The issue is not just about broker bonds. It is to do with disclosure of charges for work carried out on your behalf as an investor.
"The same points could be made about all types of managed portfolio services. For instance, how often are you told about the dealing charges for the company looking after your shares, as opposed to what they charge you?
"And what about the so-called `creation costs' of ordinary unit trusts? This could mean that even if you have a large part of the bid-offer spread [the difference between the buying and selling price] rebated back to you, you may still end up paying more commission than you think. What we need is greater disclosure among all financial products or investors risk losing out."
Heavy charges for indifferent performance from broker funds have figured strongly in mis-selling claims made by hundreds of mostly elderly investors who placed their money with Knight Williams, an IFA firm which went out of business in 1995. They are still waiting for compensation.
The PIA's proposals for reforming this little-known section of the industry include a requirement for more formal qualifications for advisers who run broker bonds.
They should also tell their clients that there may be a conflict of interest between them being supposedly independent advisers, yet recommending funds in which they have a direct commercial interest.
Advisers will also have to inform potential investors that the extra fees they pay for a broker bond may lead to their funds performing no better than traditional ones.
Long-running concern about these funds recently led to the formation of the National Association of Broker Fund Managers, a trade body hoping to clean up the industry and put forward a more wholesome image of its members. Despite repeated calls, no one from NABFM was available for comment.Reuse content