Being a fund manager must be rather like being a Premier League goalkeeper — everyone tends to ignore you when things are going well, but when times are tough you are blamed for almost everything. Perhaps this thankless existence (huge wage packets excepted) explains why both professions are notoriously protective of their own. All football fans know of the goalkeepers’ union — the unofficial alliance that means goalies never speak ill of each other. And it is no different in the world of professional investment. Most fund managers are as tight-lipped as they are well-paid. This week, however, a former industry insider has decided to blow a whistle — and loudly.

Alan Miller, a founding shareholder and chief investment officer at the now defunct New Star Asset Management, said that investors could be paying up to £5.8 billion in “hidden” fees — in addition to the £4.3 billion in annual charges officially reported by fund groups.

Mr Miller, who set up Spencer-Churchill Miller Private, a wealth management business, after New Star collapsed last year, called for an overhaul of the standard charging structure known as the “total expense ratio”.

He said this ratio — which aims to give investors an overall idea of how much they are paying for a fund — does not include various forms of commission, taxes and interest on borrowing. According to his analysis, the total expense ratio of an average UK All Companies fund is about 1.6 per cent a year. However, if you include all the hidden charges, the average cost is actually as much as 2.8 per cent.

This is important because the less transparent fees are, the easier it is for the investment industry to bump them higher. And frankly, they are plenty high enough already. Retail investors — many of whom, we should not forget, have lost large amounts of money over the past ten years — would be horrified if they knew the full extent of the salaries and lifestyles enjoyed by the City gentlemen who manage their hard-earned cash.

Of course, most investors are only bothered about the overall return on their investment. But nobody should underestimate the extent to which charges can eat into performance, particularly when stock market returns are subdued.

Hidden charges are in nobody’s interest but the industry’s, so the Financial Services Authority (FSA) should listen to Mr Miller. But it is not enough only to re-figure how charges are calculated. There also has to be wholesale reform of the way costs are communicated to investors. You have only to look at the huge variation in fees on UK index tracker funds, which are all very similar products, to see how the current rules have failed.

Tracker funds simply follow the ups and downs of any given market, such as the FTSE all-share index, and require no active management. Yet the annual charges on these funds vary from a competitive 0.27 per cent at HSBC to an astonishing 1.46 per cent at St James’s Place. Nobody in their right mind would pay £1,000 for a TV that has the same specification as one at £185, but the equivalent of this happens every day with tracker funds. The simple reason is that the FSA does not force fund groups to make the costs sufficiently clear.

The effect of charges on long-term returns is frightening. If you invested £7,000 in the most expensive tracker fund each year for 30 years, your nest egg would eventually grow to £538,827, assuming 7 per cent annual growth. But if you invested in the cheapest fund, your money would grow to £672,354, making you £133,527 better off. That is a difference of more than 25 per cent.

Of course, part of the problem is that investors do not necessarily understand how charges work and the impact they can have on performance — but this, if anything, makes the FSA’s failure even worse.

Fund managers must be forced to present charges far more prominently in marketing literature, and in a standardised form that is easy to understand.

Annual statements should also include prominently displayed details of how much has been deducted — in actual and percentage terms — and clear projections of how the fees will affect long-term performance.

It is no understatement to say that the investment industry has grown fat and lazy on overly generous fees that have effectively — and in some cases actually — been hidden from investors. To return to the football analogy with which I began, it is time that the FSA showed the current system a red card.

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