Fund fee hikes ‘must prompt immediate client reviews’

Advisers are being warned to react quickly to hikes in the fund charges levied against increasingly cost-conscious clients, who will demand they justify the impact on returns.

Investment professionals polled by Professional Adviser said a client’s portfolio should be reviewed as soon as possible after any increase to ensure the investment is still suitable.

Standard Life Investments sparked controversy last week over plans to up its annual management charge (AMC) on seven retail funds, including the flagship £1.3bn UK Smaller Companies fund run by Harry Nimmo.

Investors in Nimmo’s fund will see its AMC upped by 10bps to 1.6% from November to “make it more competitive”, despite the fact SLI is closing it to new money and so is not bearing the cost of marketing to new investors.

Adrian Lowcock, senior investment adviser at Bestinvest, said where a comparable fund is available, lower switching charges and the decline of exit fees mean any rise in AMC may mean clients’ money is better elsewhere.

“It’s important not to underestimate the impact higher fees will have on performance. An increase in the AMC – [even if it is] at a fraction of the cost of switching – over several years can be significant.

“As long as the switching charge is not too onerous it is usually better to switch.” With investments held for an average ten years, an increase of just 10bps on annual charges would eat into returns by an extra 1%.

Advisers who wait even a few months to rebalance an affected client’s portfolio at their six month review could be accused of failing to act in the best interests of investors, said Lowcock.

“What benefit is there to the client in waiting? Check straight away if the fund is still suitable.”

Suitability will rely on cost measured against performance, and the justification from the fund manager for the hike.

Tony Shah, associate director at Christchurch Investment Management, said increases in AMC “naturally cause concerns” about how much value the fund manager is adding for the increase.

“AMCs are a very big part of the costings you have to take into account for a client and IFAs have to be very careful to explain changes in cost. Clients today are more aware of charges and will ask why they are paying more.

“The answer should be some improved performance, more diversification or a new person managing it with a better track record.”

Ashcourt Rowan Asset Management’s head of collective investment research, Tim Cockerill, said justification should come from what the investment is doing.

“If it is achieving what the client wants, advisers must be certain the benefit of reinvestment will recover the cost of moving. But I can’t see strong justification for an AMC rise given the direction of financial services toward lower cost funds.”

JP Morgan unveiled its low-cost global absolute return fund, Global Equity Absolute Alpha, in June. It followed hot on the heels of rival Schroders which launched two low cost active managed funds in March, including the Schroders UK Core fund.

 Standard Life Investment fund charge increases