Active funds management questioned: report

The costs of active fund management fees are about to come for criticism from a Government-commissioned report in the United Kingdom.

The report, commissioned by Treasury and due out today, is expected to say that long-term investors think twice about paying fees to have their share investments actively managed, the Financial Times reports.

Instead of using actively managed funds investors should be considering using index funds which replicate market returns and have far lower fees.

The report was commissioned a year ago after a crisis of confidence in the £240 billion long-term savings industry. One of its objectives was to see what could be done to encourage consumers to save.

While the report is likely to fuel a strong debate on the issue, that debate will be fanned by the Consumers' Association, which claims that only one third of active funds managed to beat the FTSE 100 index during the past 10 years.

The association says that average charges varied widely - for index tracking funds the initial fee was 1.5 per cent and annual management charge 0.8 per cent compared with 4.3 per cent and 1.2 per cent for active funds.

Another theme in the report which is relevant to New Zealand is the issue of tax incentives.

While most of the political parties in this country are arguing for incentives to encourage savings the UK report is expected to question the effectiveness of such mechanisms.

It author, Ron Sandler, suggests that if the government wants to encourage more savings, it should do it through a matching scheme. This would involve, for example, the government contributing £1 for every £1 saved by the individual.

This means savings incentives could be taken out of the tax system altogether.

The report will call for independent financial advisers to charge a fixed fee for advice rather than be rewarded with commission.

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