Lipper report shows 10 years of rising TERs

Total expense ratios (TERs) have continued to rise steadily over the past ten years, adding a further 0.13% between 1998 and last year, according to a report from Lipper.

Last year the average TER, a measure of the total costs of managing and operating a fund, was 1.65%, compared to 1.52% in 1998.

The average management fee, which makes up a large part of the TER, is now at 1.48% from 1.33% in 1998. This total also includes the trail commission paid to advisers; typically around 0.5% per annum.

Ed Moisson, author of the report and director of fiduciary operations at Lipper, says that, having stripped out multi-manager funds from the figures, the TER rise can be attributed to a number of factors although the main causes are fund closures and the launch of new vehicles.

"When funds launch they set their fees at or above the industry average, also when companies make any changes to fees more often than not they increase them," Moisson says. "While these increases are not huge year on year, over time they do add up."

Moisson suggests there is growing pressure on asset management companies from a number of sources to drop fee levels.

However, he believes the current economic environment will make this difficult for many to achieve in the short-term as significant falls in asset values put pressure on managers to control expenses.

"Recent proposals by the FSA in its retail distribution review are a clear move to end the practice of offering advisers upfront commissions to sell long-term savings products," says Moisson.

"Such a development would clearly open up the possibility for more retail investors to be paying lower fund charges."

In addition to legislation from the FSA, Moisson says new entrants to the market will put further pressure on fund houses to reduce fees.

These include American fund group Vanguard which recently entered the UK space, targeting high net worth individuals. Its TERs are markedly lower than its tracker counterparts in the UK, despite being higher than in the US, with its Dublin-domiciled equity index range averaging a TER of 0.46%.

Nicholas O'Shea, director at Pharon IFA, says investors should be aware of a fund's TER, as it is ultimately the real cost of the product, but adds the figures must be considered in context.

"I will always take the TER into consideration when choosing an investment and it is important from a client's perspective to be fully aware of it, however, it is not a deal-breaker," he says.

"I believe there is sometimes too much emphasis on charges when really people need to be looking at the value the manager is adding. If a TER is high on a fund but the manager is adding real value then I would not be put off."

Key Facts

What does Total Expense Ratio - TER Mean?

A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER.