Total Costs and Charges of the Financial Industry per Head

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The Sandler Review says in the Foreword: "the average unit trust underperforms the market by 2.5 per cent a year". I cannot find this figure elsewhere in the Review, and do not know the original source. It seems to come from 1.5% explicit or disclosed charges and 1% hidden or undisclosed charges.

Explicit charges are the total expense ratio (TER) which is calculated for different funds by Fitzrovia ^x Hidden charges are dealing costs which are calculated by taking a multiple of portfolio turnover. The FSA suggests a multiple in the range 1.5 - 1.8 %. Average portfolio turnover for equity funds in the Fitzrovia report Portfolio Turnover of UK Funds is 72.3 % for all funds and 63.3% for UK funds. This produces hidden charges of 1% of capital per annum when dealing costs are 1.6% of turnover since 63 x 1.6 = 100.8.

2. Total charges

Table 1 gives assets of the savings market.

Table 1

UK savings market (as at end 2002)

Type of saving	£ billion	%
Occupational pensions: insurance schemes	196	7%
Occupational pensions: in-house schemes	588	22%
Personal pensions	333	13%
Medium and long-term savings: insurance company products (e.g. bonds)	226	8%
Medium and long-term savings: other products (e.g. unit trusts)	576	22%
Deposits and cash	743	28%
Total	2662	100%

Source: Treasury Committee x

Retail savings "products" are: insurance schemes, personal pensions, insurance company products and other products which total: £ 196 + 333 + 226 + 576 = 1331 billion.

Multiplying £1331 billion by 2.5% we obtain £ 33.3 billion per annum of charges. Dividing by 60 million, the population of the UK, we obtain £555 per person per annum. 20% of the population are pensioners. These charges would therefore provide a pension of £2,773 per annum per pensioner.

The Oxford Research Associates report Assessment of Soft Commission Arrangements and Bundled Brokerage Services in the UK (April 2003) ^x contains the following table:

Table 2

The funds under management in the UK, December 1999 (£ billion)

Holders of funds	Total value of assets (£ billion)	Proportion held by UK clients (%)	Proportion held by overseas clients (%)
Pension funds	985	78.9	21.1
Insurance companies	1094	94.5	5.5
Unit and investment trusts (net)	177	66.1	33.9
Money market mutual funds	28	25.0	75.0
Other	193	0.0	100
Institutional funds total	2477	78.1	21.9
Private client funds total	380	86.8	13.2
All funds	2857	79.3	20.7

Total funds under management in the UK at end 1999 was £ 2,857 bn. If average costs and charges are 2.1 % of capital per annum, this is equivalent to charges of £ 1000 per person per annum for all the 60 million population of the UK.

If instead of total funds we consider just insurance companies, unit and investment trusts held by UK clients, then an annual charge of 2.5 % produces charges of £480 per person in the UK.

3. Dealing costs

Dealing costs arise from stamp duty, stock brokers commisssion and the differences between buy and sell prices.

stamp duty

The amount (£ billion) of stamp duty paid on stocks and shares 1998-2004 was: ^x

Year	1998-9	9-2000	2000-1	2001-2	2002-3	2003-4
S Duty	2488.0	3711.3	4476.9	2852.1	2538.1	2559.3

Stamp duty paid in 2003-4 was £2,559.3 billion. Stamp duty is 0.5% of turnover. Assuming dealing costs are 1.6%, and dividing by the 60 million population of the UK, total dealing costs are then:

2,559,300 x 1.6 / (0.5 x 60) = £136 per person

commissions

The report from Oxford Research Associates report An Assessment of Soft Commission Arrangements and Bundled Brokerage Services in the UK (2003) ^x says that total brokerage commission increased "from £ 1.5 bn in 1992 to £ 5.7 bn in 2000" (paragraph 103) Of the £ 5.7 bn, £ 4.5 bn was paid by institutional clients as opposed to private clients (paragraph 218). Payments (£ bn) to UK brokers for the year 2000 are therefore:

turnover

The London Stock Exchange states that UK equity turnover in 2002 was £ 1,815,034.2 million ^x. Multiply by 1.6 % the cost of a trade. Divide by 60 million people in the UK. In 2002 the cost per person in the UK of trading on the LSE in UK company shares is therefore:

£ 1,815,034 x 0.016 / 60 = £ 484 per person

This is 3.5 times higher than the £136 per person we obtained from stamp duty. What is the reason for this? It seems to be caused by trade in derivatives such as contracts for difference (CFDs) which do not pay stamp duty.

Stamp duty paid in 2002-3 was £ 2.538.1 bn. At 0.05% this was on a turnover of £ 2.538/0.05 = 507 bn. But the market capital value at 31.12.02 was £ 1,147,827.3 million. ^x Therefore the (stamp duty paying) turnover was 507/1,147 = 44.2%. The mean for 287 actively managed UK equity funds - unit trusts and OEICs - in the Fitzrovia report Portofolio Turnover of UK Funds is 64.1% and median 55.1%. Private shareholders have a lower portfolio turnover than institutions. The portfolio turnover of unit trusts and OEICs seems to be only slightly higher than the average for the rest of the industry.