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Charging management fees on failing funds takes the biscuit

Jill Kerby - The Sunday Times,

Sun, April 26, 2009

Bank of Ireland last week launched two new capital guaranteed tracker bonds— those tired, opaque, derivative investments that promise to return your money after, typically, four to six years. The catch is that they put a ceiling on any growth the tracked indices of stocks may earn and pay no dividends.

I’ve never thought there was an optimum time to buy a tracker bond: they are no more than glorified deposits, with a tiny portion of your stake exposed to specific stock price movements.

Whether the market is rising or falling, it is more cost-effective to put the bulk of your funds in the highest yielding savings account you can find and put the rest on your favourite shares or low-cost exchange-traded funds; over six years, the yield on the savings should secure the capital tracking the shares.

With the markets so volatile, charges are still a big part of the risk you take investing in pooled funds of any kind. Some life assurance companies and specialist fund managers spread their initial charges and commissions over a number of years, but too many still pocket up to 5% of every contribution as well as ongoing management fees.

The problem with trackers is the charges are bundled into the derivative pricing and it’s impossible to compare them with the more conventional plans, or to the much more transparent (and non-commission) direct, online providers such as Quinn Life and Rabo Direct.

Quinn has no upfront charges and its annual fund costs are mainly in the 1% to 1.5% range; Rabo Direct has just waived its usual 0.75% entry fee for the rest of this year, which is very welcome. Its fund prices range from 1% for some bond funds up to 1.75% for more specialist funds.

Conventional life assurance providers and other fund managers are still not only charging high initial fees, but also annual management fees as high as 1.75%-2%, no matter whether your investment’s value goes up or down.

Bank of Ireland Life gently scolds what it calls the “biscuit tin mentality” that is prevailing among those ordinary retail customers who once saved their special savings incentive account money with the bank, or invested to cover their children’s third-level education.

The biscuit tin seems a perfectly sensible option to me when, a year into the downturn, not only do the fund managers keep losing clients’ money, but also seem to think it’s perfectly acceptable to pocket 5% of every monthly contribution and, annually, another 1.5% or 2% of the entire loss-making fund.

If the fund managers took their hands out of the cookie jar, then people might take their money out the biscuit tin. Here’s a novel marketing idea: why not announce that from May 1 all management fees will track the fund’s performance?