Sam Dunn: They put you off investing, fees. They don't mean to but they do

Driven to distraction: Philip Larkin once implied that parents should keep their own counsel. When it comes to 'you get what you pay for', he may well have been right

Driven to distraction: Philip Larkin once implied that parents should keep their own counsel. When it comes to 'you get what you pay for', he may well have been right

I don't believe Philip Larkin was quite right about our mums and dads. "They fuck you up", he once famously wrote, but most parents don't go much further than driving you to distraction. That said, they do have a tendency for dispensing what pass for pearls of wisdom.

They'll claim they've forgotten it now, but my parents often told me that real value always costs more - you get what you pay for.

Sadly, it was only after years spent handing over shedloads of cash to a mix of overpriced retailers and flashy restaurants that I discovered, in many cases, quite the reverse is true.

This isn't to suggest that expensive goods are always a rip-off. Rather, it's an assertion that charges for goods and services can often be unnecessarily high and have nothing to do with value; they simply pad the company's pockets at your expense.

Such censure has often been levelled at fund managers and the administrative charges they impose to try to make a return on your cash.

Typically, it costs 5 per cent of your investment just to buy into a retail fund - and then a further 1.5 per cent each year to pay the company to manage it.

How much you actually pay depends on how the fund is bought. Go through an independent financial adviser (IFA) and you should get a discount - a reduction to 3 per cent, say - while a discount broker can screw this down to 1 per cent or less. Buy the fund direct, though, and you'll pay full whack.

When markets were galloping ahead, none of this was much of an issue for investors, since the annual returns tended to outstrip the fund charges and translated into healthy gains.

But the stock market downturn and subsequent sticky patch have left these fees standing out like boulders on a beach when the tide is out.

With fund values falling or barely moving an inch, many investors began to blink at having to pay charges - particularly to buy into a fund - regardless of the manager's performance.

Against a background of growing mistrust of investment companies, brought on by problems including endowment and pension mis-selling, these high initial fees have begun to look vulnerable.

This may turn out to be fanciful, but there may be a few signs of profound change in the fund management sector.

Nationwide has just launched a low-risk fund (run by Merrill Lynch) without an initial fee. You put your £500 in and this very same sum is invested on your behalf straight away; you pay just a 1.5 per cent annual fee.

The building society is not the first to offer free entry to a fund, but if it beats target returns and tempts new investors into the stock market, it will serve as an example to the rest of the industry.

Abolition of the initial fee, a costly barrier that deters many would-be investors, would be little short of revolutionary. It would turn the long-established relationship between fund companies and IFAs on its head (with the advisers losing much of their commission), prompt many industry job losses, and probably lead to performance-related fees for managers so that their employers can recoup the money - something already practised by one investment house, Bedlam.

Few fund managers have yet to take a serious look at this scenario, although regulation changes last year have already made it easier to do so.

Privately, IFAs talk of a desperate need to encourage clients back into equities, and a number have begun to murmur about managers keeping the initial fee but having it scaled down from 5 per cent.

Others still believe that you have to pay more for performance - that it doesn't matter what you pay in fees because a good manager will always be worth it.

Yet the mediocre performance of plenty of fund managers over the past few years belies this, and no star manager can shine for ever.

We may be a long way off but the end of the initial fee could one day breathe new life into our appetite for stock market investment.

s.dunn@independent.co.uk

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