Let's be clear

What do the following two examples have in common? Example 1: If a 25-year-old saves £1,000 for retirement in 40 years’ time how much will they have? That depends on the rate of return. Using a 5% rate (realistic in current conditions) the amount is £7,040. A fund manager who charges 1% reduces this to £4,801. Factor dealing costs of an additional 1% and you have £3,262. In other words, you lose (7,040-3,262)/7,040 = 53.6% of your investment. Example 2: A customer pays 0.99% for a 2 year £70,000 mortgage with a fee of £1,499. Amortise the fee and the rate is (1,499/2)/70,000 = 1.07% higher or 2.06% The common theme? It’s how Joe Public gets side tracked or should I say "ripped-off". Whether this is a regulatory issue is a moot point. Suffice to say that retail facing financial services are under a fiduciary duty but also have a conflict of interest (profit). Therefore, unlike other industries they should be duty bound explain in simple terms how much they are taking out of the customer in terms that the customer can understand. It’s interesting to see that the teaser rate and fee model has been dropped by some banks. This is a step in the right direction. But a lot more could be done. In particular the funds industry needs to be open to showing dealing costs in the expense ratio. No one wants to see over half of their pension disappear in fees and commissions.