A new report suggests that most of us are paying too much in charges because we are ignorant. The report, The Price of Retail Investing in the UK, was written by an American who works for the SEC, the American super-regulator. Here's the most interesting sentence among the highlights of the report which were published last week:
"Investors pay too much for portfolio management services because they do not know enough to pick sensible funds on their own and because the funds exploit the errors in their decision-making for their own profit."
The problem is that retail investors (you and I) are underwriting the operation of efficient stock markets because we pay over the odds for active management. Anyone paying an initial charge of 5 per cent plus management fees of 1.5 per cent a year is a mug.
So what's the solution? The smart people are looking for cheap, consistent ("sensible") funds, whether they are index-tracked or actively managed. Those "in the know" also save most of these charges by buying from a discount broking house (see page 8) rather than through an independent financial adviser or direct from the manager. This leaves the rest of the ignorant punters subsidising overpriced, over-hyped funds.
You don't need to wade through pages of incomprehensible tables to spot a low-cost stock market fund. The new tax-free ISAs (individual savings accounts), which replace PEPs and Tessas next month, can be set up to carry a CATmark. This is a Treasury-endorsed standard which guarantees you will get a good deal on costs (CAT stands for low Cost, easy Access and fair Terms).
To get a CATmark a stock market ISA fund must have no initial charge and all the other charges must add up to no more than 1 per cent a year. A fund with a CATmark will be easy to spot, so all you have to do is check the fund's aims and past performance and decide whether it's right for you.
That's easy enough on index trackers, which follow the markets up and down and are cheap to buy and run. But have the fund managers been rushing to offer CATmarks on actively managed funds? My research revealed only three: Standard Life, Fidelity and Norwich Union.
The vast majority of fund managers are deliberately resisting the Government's efforts to bring prices down. If you play along, and buy their overpriced funds, then this scandalous overcharging will carry on forever.
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