Following high street banks' advice can damage your wealth

RBS-owned NatWest was the most notable underperformer, with 94.9 per cent of its funds failing to produce returns comparable to the average of their peer group over ten years.

Matthew Morris, director of DMP Financial, accuses Britain's high street banks of unacceptable investment returns: "Our conclusion could not be starker: banks have poor performance as a general rule of thumb. It appears that they have not only failed as bankers, but also as investment managers.

"Investors have just over 45bn invested with the banks in the funds we analysed; can we see any reason why an investor should choose to use a bank to manage their investments? No. Their performance has been consistently bad and because they get away with it, we see no reason why this will change."

The research – available at www.challengingadvice.co.uk – found that 124 of the 207 funds offered by the high street banks have performed below average over five years, while 87 of the 143 funds with ten-year records have underperformed. Consequently, many investors have paid more in charges than they have reaped in returns, according to Morris.

Of the five banks featured in the research, HBOS fared best over five years, with just 10.4 per cent of the 14.5bn under its management performing below average. But 80.9 per cent of the money managed by Lloyds – part of the state-backed Lloyds Banking Group – has underperformed over the past five years, as has 57.8 per cent of that run by NatWest, owned by taxpayer-backed RBS.

Over ten years, the banks have managed 28.1bn of customer assets in 143 investment funds. Of the 1.9bn invested by NatWest over ten years, 94.9 per cent has fallen short, as has 63.1 per cent of the 931.4m managed by HBOS, owned by Lloyds Banking Group.

That the funds have sold on such a scale is due largely to the banks taking advantage of their profile to cross-sell products to their customers. This is particularly prevalent in the current climate, as bank advisers recommend stock market "solutions" to savers disgruntled with poor returns on cash accounts.

Gordon Wilson, the managing director of independent financial adviser Thomson Shepherd, claims that banks exploit the fact that few investors carry out any research into their options: "It's not so much about advice as pile 'em high sales. You just need to look at the complaints statistics for the industry to understand where the bad advice generally comes from. Banks, especially, have a terrible record."

So what can investors stuck in underperforming funds do if they want to find a better home for their money?

Predicting investment performance is a mug's game, but there are certain factors – from charges and objectives to manager pedigree – that investors should consider when deciding where to put their cash.

• KNOW YOUR GOALS

Be clear about what you want from your investments, whether it's income, growth or a combination of the two.

Do you want exposure to particular regions or sectors? How much risk are you comfortable with taking?

These questions are best addressed with the help of an independent financial adviser.

• CHARGES

Many investors underestimate the extent to which high charges erode returns over the long term. Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee, recommends paying close attention to fund management costs, most notably the total expense ratio (TER): "Annual management charges do not provide a full disclosure of total fund costs and neither does TER, but it's a better guide."

Adrian Lowcock, senior investment adviser at Bestinvest warns against paying commission to banks for selling their own products.He said: "They are not giving independent advice, but acting as a salesperson targeting increased revenues for their branch. "If they are selling their own funds, ask to see comparisons with top-performing funds in the sector."

• STOCK TURNOVER

A fund's turnover rate shows how many of its holdings have changed over the past year. A high level usually means extra costs, so it is worth asking for the average or most recent annual turnover. A Financial Services Authority report on the price of retail investing estimated the cost of turnover as approximately 1.5 per cent per 100 per cent turnover.

• PERFORMANCE

Past performance is not a guide to future success, but a fund's long-term track record might give you, for example, pointers on stability or experience of the fund managers.

Lothian says: "This, of course, does not give any indication of how a fund might do in the future, but it's one thing that can be easily established as managers are obliged to publish performance figures relative to the appropriate benchmark."

While many funds can ride favourable conditions to post strong short-term returns, performance over ten or at least five years or more is a better guide.

Also, bear in mind any unusual market circumstances that may have distorted performance, such as the tech and property bubbles.

Websites publishing up-to-date fund performance figures include www.trustnet.com and www.iii.co.uk.