The Financial Conduct Authority (FCA) recently released a report that not everyone is getting an appropriate return on the money they pay in fees for asset management. As reported by the BBC, a lack of transparency regarding the fees involved makes it difficult for consumers to compare offers from different funds and investment firms.
Most people hope that asset managers act in the best interests of their customers. Often, that requires clear competition that encourages asset managers to perform to a higher level. However, many working in the financial sector benefit from the fees of handling the funds even if performance is questionable. To complicate matters, complex fee structures make it difficult for investors to understand what they will owe until the bill comes due.
Why Use Complicated Fee Structures
Many believe that complicated fee structures are used to intentionally confuse consumers. Since many investors rely on asset managers and financial professionals, they are at the mercy of the person who they choose to hire. A complex fee system gives additional power to those managing the money. Even if an asset manager is focused on providing their clients with value for their money, it creates a level of mystery regarding how the operations work.
One way to simplify the process is through the use of all-in fees. Instead of creating layers of fees based on different actions and situations, a single fee would cover all associated services. By disclosing these fees upfront, consumers could compare offerings between asset management firms. Information about previously achieved returns helps create a full picture of what an investor gets for the money involved in participating in each fund.
One thing that the financial crisis brought into the limelight is a desire for additional transparency. Many believe the financial services sector is overly complex, leaving consumers confused about how their money is used, what fees are required, and what results that can anticipate. Regretfully, shifting to a more transparent system takes time. And more time is required if the financial companies are resistant to the changes.
Even though the Investment Association asserts that improvements in cost transparency have been made, there is room for additional improvements. Recommendations about potential actions are expected next summer, based on a statement from the FCA.
The ultimate goal is to create a system that your average consumer can understand. It also provides a mechanism to comparison shop and could increase competition. If competition increases, it may drive costs down further to attract the most customers. In the end, every day investors could find better deals than they can identify today. Or, they would at least understand why certain charges occurred and can decide if they feel they were justified.
With more information comes the ability to make better decisions. And this allows investors to decide if active fund management is worth the cost of admission.
Regardless of your investment method, a return can never be guaranteed. That makes clear information all the more important for everyone who invests.