Going Direct

There was a good article in last weekend’s money section of the Telegraph. It was by Kyle Caldwell, and the theme was investors who are trying to keep their costs low by investing direct with fund managers rather than use an adviser.

In finance, as in life, one would expect to see reduced fees if one was to cut out the middleman. Sadly, fees and charges in finance are not always clear and the normal rules don’t always apply. As the article pointed out, there are two charges to consider – the ongoing charge and the front-end charge. The ongoing cost of investing as measured by the annual management charge - AMC - has long been 1.5%, which includes 0.5% commission paid to the broker. You would think by cutting out the broker, this charge would reduce to 1%, but that’s not the case. All that happens is the fund manager keeps the extra 0.5%, while you don’t have a broker to call and get updates from.

Now, the investment world has changed and it is easier to see the 0.5% the Broker is earning, but the principle remains the same – if you go direct, you will pay the full AMC – including the broker commission.

While that all sounds rather unpalatable, the front-end charge is worse. Traditionally, that has been 5% of the amount you are investing. So if you’re investing £10,000, that’s a fee at the outset of £500. From that, the Broker traditionally kept 3% and the fund manager kept 2%. With the new rules recently introduced banning commission, fund management groups have launched funds with no front end charge, leaving the broker to charge their fee direct. This is great as it means you can see who is earning what from your investment, although in many cases the broker is costing you significantly more than the previous 3%.

More importantly, however, is if you decide you don’t need the broker and go direct, the fund manager will only give you access to the old-style funds – which still carry a 5% charge upfront.

The basic principle here is don’t assume the fund management group, or indeed the adviser, will pass on to you any cost savings from the new rules. In the world of personal finance, profit is king and the fund managers will run with old-style funds and high fees for as long as they can get away with it.

So what’s the answer? If you want to go direct, use a platform or fund supermarket. They act as bulk-buyers and most have secured clean funds with no front-end fees, and usually don’t charge you anything to invest. If you’re not sure what funds to buy, use a broker – at www.reckitthouse.com we provide fund advice online, so maybe we can help.