Monday, December 19, 2011

How fees are destroying pension wealth in the UK

As readers of my blog will know, I frequently rant about fees charged by investment advisors.  In most cases, the people getting ripped off are individual investors.  But in a recent report on the UK pension system, it is revealed that fees paid to City advisors (the City is the UK equivalent of "Wall Street") are so high that in many cases the pension funds are paying all their gains out in fees.  And it's getting worse.

The average equity fund manager makes explicit that they are charging about 1.5% a year of the sum invested for their services, but additional hidden expenses average 0.3% a year and trading costs cut a further 1.4% off an investment. And the situation is getting worse, according to the analysis, which found that charges had increased by 9% in the last decade. The presentation added: "If the trend of diminishing returns and increasing costs continues we could soon expect negative returns on average."
The mind boggles.  There is absolutely no reason why fees should be increasing, furthermore, management fees should not exceed 0.5% for large funds.  The trustees of these pension plans need to start shopping around more.   I'll give them one piece of advice for free.  Try indexing.   It's cheap and it works.