Before 2013 people generally paid in the region of 1.5% for an actively managed UK equity fund.

Even if you used a financial adviser and/or invested via a platform this was potentially the only charge you paid, as they received a portion of the 1.5% from the fund group as a rebate.

For example, for a fund with a total charge of 1.5%, the fund manager would typically retain 0.75%; the adviser would get 0.5% and the platform 0.25%.

If you invested directly with a fund group – which many would have done, particularly in the 1980s and 1990s – the fund group would still have charged the 1.5% and kept it all.

If you invested without using an adviser via a direct-to-consumer (D2C) platform, the platform may also have received some of the 0.5% normally paid to an adviser passing the remainder back to your account as a rebate.

The Retail Distribution Review changed all this between 2012 and 2014.

Platforms were no longer able to receive and retain rebates from fund groups and all costs had to be disclosed separately. As a result, many fund groups introduced lower prices for their funds. Platforms and advisers were now paid separately by the customer.

In theory this should mean the fund charge in the earlier example drops from 1.5% to 0.75% – but the fund itself remains exactly the same.

However, in many cases the older, more expensive versions of the funds still exist and people might inadvertently be invested in them and hence paying too much.

The impact on potential investment returns can be profound. The table below shows the value of a £100,000 investment over time with a 1.5% charge compared to a 1% (assuming a 0.75% fund charge + 0.25% platform charge). It assumes a 5% per year gross investment return.

Who might be affected by this?

According to figures from the Association of Professional Financial Advisers (quoted in The Sunday Times) around £765m could be held in funds where investors are paying more than necessary.

Those most likely to be overpaying include:

Anyone who invested directly with a fund group

Someone who has used a financial adviser in the past but doesn’t anymore

People who have mistakenly invested in the wrong version of the fund

If you’re unsure whether or not you are overpaying, have a look through your fund picks and sift out any where the charge is more than 1%. You can then simply search for the fund via your online platform to check whether a cheaper version is available. (TS)

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