A City insider today blasted "hidden charges" imposed by fund managers that double the fees imposed on investors to more than £10bn a year.
Alan Miller, a former director of New Star Asset Management and one of the industry's big names, said fund managers had maintained complex cost structures to hide bloated and excessive fees that added an estimated £5.8bn to the £4.3bn annual charges explicitly reported by major firms in the Square Mile.
Miller argued the industry's standard measure of the operating costs – the total expense ratio (TER) – should be replaced with a calculation that includes all the costs of running a fund.
Consultants Watson Wyatt said the same problem affected private equityinvestors who faced unwarranted charges and "egregious terms".
It said: "Management fees form too high a share of a firm's compensation and are therefore the most significant factor misaligning their interests with those of its [investors]. This misalignment is exacerbated by the manner in which performance fees are most commonly calculated in the bigger markets."
Their call adds to the discontent among a growing band of investors and advisors who argue that attention on the banking industry has deflected politicians and regulators from clamping down on practices that arguably played a greater part in fostering the financial crisis.
Hermes, the fund manager for the massive BT and Post Office pension schemes, has spent the past year lobbying in Europe and the US to promote shareholder activism.
Colin Melvin, the head of the fund advisory arm, Hermes Equity Ownership Services, has voiced concerns that shareholders failed to restrain the debt fuelled borrowing binge that eventually caused the crash. He has attempted to build a coalition of investors to confront excessive fees imposed by fund management houses.
His colleague David Pitt-Watson, who gave evidence to the Treasury select committee during the financial crisis, recently warned that up to 40% of private sector pension pots are swallowed up in fees.
In a report for the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) he argued that investors found "fund managers unaccountable and institutions opaque".
He criticised the process of "churning" through which shares held in a pension plan are sold and the funds switched to buy other assets. Miller estimated that a typical fund manager would turn over about 57% of their portfolio each year, which added "various costs amounting to a further 1% a year".
He said the "true cost of investment" was pushed up from an advertised average of 1.6% to an average 3.8% per year over a five year period.
Miller, who co-founded wealth management business SCM Private earlier this year with a claim to provide clear charging structures, said: "These hidden charges act as a significant drag on performance, particularly when overall returns are low.
"The TER calculation excludes a host of additional costs and it's time for a new calculation to be adopted that includes actual management fees and all other charges impacting on investors' total returns."
British investors have £88.45bn invested in UK All Companies funds, paying an estimated £1.9bn in additional charges each year on top of the "reported" £1.4bn of annual charges the fund management industry declares through the TER benchmark.
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