Morningstar, the fund research company, said lower-cost investments are more likely to outperform those with a higher-cost and the industry should be more transparent in disclosing fees to investors.

Paul Ellenbogen, director of board consulting services at Morningstar Investment Management, said in an article in the firm’s latest magazine: “As with an all-inclusive vacation package, it can be hard for the buyer to determine what he or she is getting for a dollar spent – and that goes for both an individual investor with $10,000 to invest and a more sophisticated institutional investor with $10m. Even if investors can figure out what they are paying for, it’s difficult to determine if they are getting a good deal relative to the fund’s peer group or if they’re getting overcharged.”

Ellenbogen wrote that all things being equal, higher expenses mean lower performance and yet fees get very little attention.

He and his colleague, John Rekenthaler, recommended the creation of five categories of fees that should be listed in every fund prospectus – portfolio management which includes research and investment management; administrative; operational which includes all the direct costs of serving shareholders in a mutual fund; distribution and finally, advice.

Morningstar said regulation in countries such as Canada and the UK could be adapted to the US and other markets.

In the European Union the proposed MiFID II regulations, which come into force in 2017, proposes that regulated asset managers should provide a single aggregate figure of all costs and charges, which should be itemized if requested by the client.

“Consider that on the performance side the fund industry has benefited greatly from standardization,” added Ellenbogen. “We need to take similar steps with expenses.”

The Investment Management Association, the trade body for UK fund managers, has already been working on making cost disclosure by funds more understandable for investors.

The IMA has been developing a new measure that tells consumers, in pounds and pence, exactly how much a unit in a fund grew over the course of a year and how much that cost in terms of every penny spent by the fund.

Daniel Godfrey, chief executive of the IMA, said in a statement last year: “Pounds and pence disclosure goes beyond any regulatory or legal requirement and is a big step forwards for consumer understanding. The IMA will also amend our codes to require clear and simple disclosure of research costs where these are met from dealing commissions paid by funds.”

Featured image via Flickr/ Eirik Solheim under creative commons