09 Dec 2011 | James Budden

Fatty Fees 

A classic story about Wall Street involves an out-of-towner on a tour of Manhattan with his urbane friend. The two arrive at the harbour, where the city dweller points to a line of elegant vessels.

"There are the bankers' yachts," he says grandly. "And there are the brokers' yachts." The visitor looks at the magnificent fleet and asks, "Where are the customers' yachts?"

It is a funny story but for those of us in the financial services industry it creates a feeling of unease in today’s environment. We currently live in a world of banker bashing and hedge fund hating. The fund management industry is not responsible for the crises that beset the developed world today but nor is it squeaky clean when it comes to what it charges its customers.

When times are tough and positive returns are hard to find, 2% per annum and a 20% performance fee on top looks obese. Multi manager and fund of funds strategies appear equally rotund with many total expense ratios north of 2.5%. Even bog standard funds can set back the investor a porky 1.75% each and every year. As we all know cost levels make a really big difference over the life of an investment.

Professor John Kay, one of Scottish Mortgages’ directors is hot on the subject. At a SAINTS sponsored event during the recent Cheltenham Book Festival he told a packed audience that one of the most important aspects of investing was to do it as cheaply as possible as well as to seek a wide diversification of investments. He practices what he preaches residing on a trust board with a TER of 0.51%. Professor Kay also advocated the long view and highlighted the damage that unnecessary trading can do to investments. Small wonder then he has been asked by Vince Cable to chair a review into equity markets and the role they play in supporting corporate performance. For his part he has enlisted the support of our own James Anderson a notable scourge of the greedy in the sector.

Please remember that changing stock market conditions and currency exchange rates will affect the value of investments and any income from them. Investors may not get back the amount originally invested.