The case for flat fund management fees – MoneyWeek

Thismatters。

Fundcostsarehugewealthdestroyers。

£10,000investedinafundthatgrowsat7%ayear(chancewouldbeafinething!

)wouldbeworth£14,000infiveyearsifyouweretopaynochargesonit。

Butpay1%anditwillbeworthonly£13,338。

Makethat2%,andyouaredownto£12,667。

Thats10%less。

Overtenyears,thisgapwidens。

Withnocharges,youllhave£19,670。

At2%,youllhave£16,070。

Thats£3,000gone。

Thankfully,therehasbeenmuchdiscussionofallthisandmuchdiscountingoffeesoverthelastdecadeorso。

Nooneshouldreallybepayingupfrontfeesanymore,forexample–allthefundsupermarketsdiscountthem(IwouldrecommendPeterHargreavesbook,InForaPenny,toanyonewhowantstoknowhowallthisworks)。

However,thebadnewsisthat–amidallthisdiscussionaboutpercentagesandcommissions–atnopointhasanyonequestionedwhywepayforfundmanagementonapercentagebasisanyway。

Wedontpayfortheservicesofotherprofessionalslikethis。

Wepayouraccountants,ourdoctorsandourlawyersbythehourorwithaflatfee–aretainer–forservicesrendered。

Whydontwepayourfundmanagersinthesameway?

Itdoesnttakethatmuchmorework–orarguablyanymorework–tomanagealargesumofmoneythanasmallsumofmoney。

Sowhyshoulditcostsomuchmore?

Whyshouldsomeonewith£20,000paydoublethecostsofsomeonewith£10,000?

Theanswermightbethatthefundmanagementindustryapprovesoftherichsubsidisingthepoor。

ButIsuspectitisnot。

Sowhynotchargeflatratesforfundmanagement?

Itwouldbesimpletodowithlargeinstitutionalfunds(managerscanjusttendercompetitivebids,astheydonow,butwithaflatfee)。

Itmightbemorecomplicatedwithretailinvestorsbutnotbeyondthewitoftheindustrytofigureout。

Youcould,forexample,justchargeeveryone£75ayeartobeinyourfund。

Then,toeasetheideaintotheindustry,youcouldchargeaperformancefeeofsomekind(another£50fromeveryoneifyoudobetterthansomebenchmarkforthreeyearsinarow,forexample)。

Imnotkeenontheideaofperformancefeesingeneral,though。

Everheardofanengineergettingextramoneyifhisbridgedoesntfalldown?

Quite。

Longer-termsuccessshouldbeconsidereditsownreward。

Doagoodjobandyoullgetmoreclients,whichwillmeanmorefees。

Doareallygoodjobandthemarketmightthinkyouarejustifiedinraisingyourfees。

Itwouldbejustlikebeingagoodlawyeroragoodmedicalconsultant–amemberofarealprofession。

Thebenefitsofallthiswouldbemassive。

Theredbetransparency–everyonewouldunderstandwhattheywerepaying。

Theredbelowercostsallaround–somethingthatgenerallycomeshandinhandwithtransparency。

Peopleunderstandflatfees。

Percentage-basedpaymentsareconfusing。

Tellsomeoneyouaregoingtochargehima5%upfrontfeeand1。

5%ayearonhis£10,000andhemightthinkthatsoundsOK。

Hewontimmediatelynotethatthat,over20years,thatllerodeaquarterofhispot。

Buttellhimyouaretaking£500rightawayand£150everyyearafterthatandhellbeoffdownthehighstreetlookingforabetterdealbeforeyoucansaybutthatsthewaywevealwaysdoneit。

Sotherewouldbeawelcomeinjectionofrealpricecompetitionintotheindustry。

Then,asahappyside-effect,wemightseelesschurninginUKportfolios:thetendencyoftheaveragefundmanagertoendlesslyfiddlewiththeirholdings,tothedetrimentoftheaverageinvestor。

Betterstill,itmightevenfocusmanagersmindsonthecorruptnonsensethatisthetrailcommissiontheypaytofinancialadvisers。

Iftheyaregettingflatfees,theyarentgoingtowanttopayanyoneelseinpercentages。

Sowemightfinallyseethebackofthecommissionsystem。



ThisarticlewasfrstpublishedintheFinancialTimes

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