Charging through the hoops

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The Independent Online
THE DEBATE on charges in the unit trust industry has been eclipsed by that going on in life assurance.

Nevertheless, the business is soon to go through the same hoops on disclosure of management charges and commission paid to financial intermediaries. The Personal Investment Authority, the body which has succeeded Lautro as the regulating authority for unit trusts, last month published a consultative paper on its proposals for the disclosure of information to investors about unit trusts and other products, which it hopes will come into effect next year.

Tim Miller, former marketing director of M & G and now chairman of Portfolio Fund Management, says: 'There has always been disclosure of charges in the unit trust industry, but it is extremely difficult for the public to take on board their significance.

'Since 1979, when controls were taken off unit trust charges, they have increased very sharply. When full disclosure of the effects of charges comes in, the difference will become clearer and unit trusts will start to compete on charges to a greater degree.'

Not everyone is happy with the way disclosure is being introduced. Philip Warland, director general of the Association of Unit Trusts and Investment Funds, says: 'The association supports good disclosure and we have no fears of it. What we do have problems with is the fact that the PIA's proposals do not distinguish sufficiently between life products and unit trusts.

'The PIA is insisting on a method of disclosure that is inappropriate for a share-based product. But you can buy them today and sell them tomorrow. They are not at all like a life product where there is a contractual arrangement which lasts over, say, a 25-year period.'

Tim Miller says that if disclosure takes the form of that used for life insurance products, it will show the long-term effect of charges. 'It is very important to consider charges as part of the product because every increase in charges is a reduction in the return to the investor.

'Annual charges have been creeping up since 1979, mainly to fund renewal charges for intermediaries. It has been possible to charge as much as one and a half per cent to fund an annual renewal fee to an intermediary of half a per cent. Half a per cent of the value of the fund is an incredible level of commission - but not many people realise this.'

Mr Miller says renewal fees have been forced on the industry, which is reliant on independent financial advisers to sell its wares. 'IFAs have to make a living and renewal commission is a very good way of making a living,' he says.

'High annual charges become particularly important when inflation falls. In the long run you get lower growth rates expressed in percentage terms.'

He says that in America, where mutual funds' charges are clearly disclosed, there has been considerable price competition, to the benefit of investors. 'Two separate markets have arisen: a market through financial advisers and a market of inexpensive funds sold directly to individuals, and because of the size of the market there are enormous economies of scale.'