Marginally higher costs accumulate over the long term, as shown in figure 1. This can be the difference between reaching their goals and falling short. Put in these terms, the importance of costs becomes crystal clear.
With fee transparency likely to remain at the forefront of industry developments over the coming years, I expect investors and their advisers to favour companies with a reputation for plain talk when it comes to charges. However, until now the investment industry has not exactly made it easy for investors to get to grips with the matter. Indeed, given the history of fund charging and distribution in the UK and the variety of fund structures available, it is not surprising that investors are confused.
For example, research conducted with 2,000 adults between 18 and 55 years of age found that just 6 per cent of respondents understood the meaning of the terms annual management charge and total expense ratio. Does this mean that 94 per cent of investors have no understanding of costs? Of course it does not, but when you add ongoing charges figures, fund manager fees and other three-letter acronyms into the blender, it is a wonder that we even managed to get to a figure of 6 per cent.
The research on investors’ understanding of industry jargon around costs raises an important point. If we want to encourage the next generation of investors, it is not good enough just to have low costs. We need to make charges as low as possible and as meaningful as possible. And, on top of that, we need to deliver simple, high quality products and a level of service that represents real value at the price that we charge.
If investors do not know what they are paying, it is hard to make an informed choice and, if they cannot make an informed choice, it is all too easy to take the easy option and defer the decision until tomorrow. To build a successful and sustainable industry that systematically helps investors to reach their goals, costs need to be low and clear and investors need to be confident that they are getting good value for money. The days of opaque charging structures are gone and advisers who have fully embraced the spirit of RDR know this.
