If you think the row about fund management charges is a tedious technicality then prepare for a rude awakening. Terry Smith is the latest outspoken multi-millionaire to lob a hand grenade into this debate which will shake the City to its foundations and could bring several institutions crashing down.

He claims investors are left with less than a tenth of the total returns some fund managers receive – and uses Warren Buffett’s famous Berkshire Hathaway fund to illustrate the impact charges can have on long-term returns. Mr Smith says he is “not so much shocked as flabbergasted by the number of people who do not realise the impact of these performance fee structures”.

Taking typical hedge fund fees as an example – but widening his attack to performance fees charged by rising numbers of unit trusts and open-ended investment companies (OEICs) – Mr Smith said: “”As you are aware, Warren Buffett has produced a stellar investment performance over the past 45 years, compounding returns at 20.46 per cent per annum. If you had invested $1,000 in the shares of Berkshire Hathaway when Buffett began running it in 1965, by the end of 2009 your investment would have been worth $4.8m.

“However, if instead of running Berkshire Hathaway as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2 per cent of the value of the funds as an annual fee plus 20 per cent of any gains, of that $4.8m, $4.4m would belong to him as manager and only $400,000 would belong to you, the investor. And this is the result you would get if your hedge fund manager had equalled Warren Buffett’s performance. Believe me, he or she won’t.

“Two and twenty does not work. That does not mean that 1.5 per cent and 15 per cent is OK, or even 1 per cent and 10 per cent. Performance fees do not work. They extract too much of the return and encourage risky behaviour.”
Mr Smith, who was rated the best banking analyst in Britain for five consecutive years in the 1980s before going on to become chief executive of brokers Collins Stewart since 1996 is the latest City gamekeeper to turn poacher by blowing the whistle on established practice in the Square Mile. Like Alan Miller, a former senior fund manager at New Star, Mr Smith plans to launch his own fund management company, offering lower costs and higher returns to investors.

Whether either or both can pull off that double remains to be seen. But, here and now, there is growing resentment among investors about high charges and low returns. Earlier this year, The Daily Telegraph revealed how fund managers pocket more than £7bn a year from charges despite a decade of falling share prices. Mr Miller, a founder of Spencer Churchill Miller Private said: “The time is right for exposure of various elements of the industry.
“It is riddled with blatant self-interest and conflicts of interest that would never be tolerated elsewhere. Investors have become victims as the charges they have to pay have risen and risen while the returns they get have been consistently below par and the actual cost of managing their money has continued to fall.”
Data from Morningstar, a research company, shows the average investment fund has an annual charge of 1.25 per cent. But lesser known administrative fees amount to 0.45 per cent. And trading costs total another 1.35 per cent, according to the Financial Services Authority and Financial Express. When this 1.8 per cent is deducted from the total £406 billion invested, that amounts to £7.3bn being “skimmed off” each year.

Some fund managers have consistently delivered investor returns that more than justified their charges; Neil Woodford at Invesco, Evy Hambro at BlackRock, Robin Geffen at Neptune, Tom Dobell at M&G, Ian Henderson at JP Morgan and Job Curtis at Henderson are six that spring to mind. But many others have failed to do so and while investment returns remain low, interest in charges is likely to increase.

Few investors cared if annual management fees were 1 per cent or 2 per cent back in the 1990s when total returns often ran into double digits. Now they are glad to be grossing 6 per cent or 7 per cent, many more investors are much keener to keep costs to a minimum. Regulatory changes that take effect in 2012 will force further disclosure of costs and accelerate this trend. However much their former colleagues may hate them, Messrs Miller and Smith know which way the wind is blowing and are, as usual, ahead of the game.

Not too sure about the math used to turn $ 1,000 into $ 4.8 million and to downgrade the $4.8 million to $0.4 million, however, the question is how many people who invested $ 1,000 in 1965 on their own made it $ 400,000 in 2009?

I personally never use unit funds as an investment vehicle but lets not write them off because of charges. There are so many people out there incapable of turning their $ 1,000 to $ 2,000 even after 30 years and ignorance may not be the only reason for that.

A good unit fund is just what such people need.

i dnt think so .the market is all efficient and makes its own decision on where it want to go after discounting/digesting all the info that there.
so in short you are saying the current bear has been caused by fund managers ????????

Which u can learn & prosper.

I saw this somewhere and saved it. It must have come from Wazua but not sure. Its the reason I've never invested with so called mutual funds, unit funds, equity funds etc.

Paying a High Price for Bad Advice
The other day a friend of mine approached me excitedly, saying, "I found the house of my dreams. It's in foreclosure and the bank will sell it to me for a great price."

"How good is the price?" I asked.

"Just before the real estate market crashed, the seller was asking $780,000 for the property. Today, I can buy it from the bank for $215,000. What do you think?" she asked.

"How would I know?" I replied. "All you've given me is the price."

"Yes!" she squealed. "Now my husband and I can afford it."

"Only cheap people buy on price," I replied. "Just because something is cheap doesn't mean it's worth the cost."

I then explained to her one of my most basic money principles: I buy value. I will pay more for value. If I don't like the price, I simply pass. If the seller wants to sell, he will come back with a better price. I let him tell me what he will accept. I know some people love to haggle; personally, I don't. If a person wants to sell, they will sell. If I feel what I am buying is of value, I'll pay the price. Value rather than price has made me rich.

Against my advice, my friend sought financing for her "dream" home.

Fortunately, the bank turned her down. The house was on a busy street in a deteriorating neighborhood. The high school four blocks away was one of the most dangerous schools in the city. Her son and daughter would either have to go to private school or take karate lessons. She is now looking for a cheaper house to buy and has asked her father, who is retired, for help with the down payment. If her past is a crystal ball to her future, she will likely always be cheap and poor, even though she is a good, kind, educated, hard-working person.

My Point of View

What follows are some thoughts on why my friend will probably never get ahead financially -- especially in this market.

1. She and her husband have college degrees but zero financial education. Even worse, neither plans to attend any investment classes. Choosing to remain financially uneducated has caused them to miss out on the greatest bull and bear markets in history. As my rich dad often said, "What you don't know keeps you poor."

2. She is too emotional. In the world of money and investing, you must learn to control your emotions. When you think about it, three of our biggest financial decisions in life are made at times of peak emotional excitement: deciding to get married, buying a home, and having kids.

My dad often said, "High emotions, low intelligence." To be rich, you need to see the good and the bad, the short- and long-term consequences of your decisions. Obviously, this is easier said than done, but it's key to building wealth.

3. She doesn't know the difference between advice from rich people and advice from sales people. Most people get their financial advice from the latter -- people who profit even if you lose. One reason why financial education is so important is because it helps you know the difference between good and bad advice.

As the current crisis demonstrates, our schools teach very little about money management. Millions of people are living in fear because they followed conventional wisdom: Go to school, get a job, work hard, save money, buy a house, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds. Many people who followed this financial prescription are not sleeping at night. They need a new plan. Had they sought out a little financial education, they might not be entangled in this mess.

A Thank You to Jon Stewart

Speaking of finance experts, I personally want to thank Jon Stewart of 'The Daily Show' for taking on Jim Cramer and CNBC. Jon Stewart did an incredible job of representing the millions of people all over the world who have lost their savings in the market. He was right in saying he thought it "disingenuous" to advise people to invest for the long term through their retirement plans while knowing full well that traders could steal Americans' retirement money by trading in and out of the market. Most traders like Cramer realize that investing in mutual funds for the long term is financial suicide. Cramer should have spoken up, but we all know why CNBC won't let him tell the truth. If he did, the station's advertisers would leave.

While I applaud Cramer for going on 'The Daily Show' and facing the music, I'm afraid he was marginalized by Stewart -- certainly outgunned -- and he has lost his credibility. He may pay an even bigger price if the SEC decides to dig deeper.

Jim Cramer is a very smart man. I watch his show. I just do not follow his advice.

In closing, I will say what I have said for years: We need financial education in our schools. Without it, we cannot tell the good advice from the bad.

CO-OP bank is fund managing NSSF mullah

Fyatu, where did uget that info? It could be very good news if its true!
I bet Co-op can do more better than it is doing currently and is capable of taking the gains of other Banks.
With its moneygram, co-op cash,co-op societies it well placed as an international bank. Hope is doing good to be a bank with alot of Yuan! Which bank is bieng used by Chinese companies investing and doing projects in Kenya? Hope Co-op!