Investors in Europe should beware hidden expenses and show caution when comparing fees, following a report which claims European investment managers are not declaring the whole truth about costs to their clients.

The research into European investment management fees by consultants Towers Perrin, reveals a marked lack of transparency in charges, particularly in Switzerland, Belgium and Germany, which is fooling investors as to the true price of hiring a manager.

Even where active investment management fees may appear low, it is not necessarily because they are low, but more probably because the investor is not seeing all the fees," says Olaf John, a consultant at Towers Perrin in London.

Germany, the report says, provides a good example of charging practices where differences of management fees, transaction costs and custody charges are not easy to assess. Historically German banks have offered a one-stop-shop for financial services, which has masked the cost of different services. As competition has increased, the report says, it has become easier to reduce visible management fees and maintain high hidden transaction charges.

Clients investing in German KAG's (institutional investment management companies) may believe they are paying around 20 basis points for asset management, but with commission charges for transactions ranging from 20-50bps on a turnover rate in some cases up to 400% per annum as portfolio assets are sold and bought back, then fees could rocket to around 160bps for the year.

A German industry source believes the report is both right and wrong at the same time: "Certainly, if you consider the issue from a US perspective, where it is expected to negotiate a price up front with an investment manager and regard transaction costs as a minor affair, then the German system of compensation through transaction fees is very different. However, I wouldn't say overall charges are any higher than in a US fund."

He argues that any prudent investor will have asked for these figures from the off, and transaction forecasts are available so such issues can be discussed.

"Maybe the German system is more complicated, but these days the fund market is so well developed and competitive that cost differences are minimal," he adds.

The report finds that Belgium has the widest spread in level and variety of costs for balanced fund managers, compared to the Netherlands and Switzerland, with lower and upper quartile charges for a BF500m portfolio ranging from 20-55 basis points. The trend is similar in bond and equity portfolios.

Koen de Ryck, managing director at Brussels based Pragma Consulting, says there is a lack of transparency in the trading costs of Belgian investment managers, but that it is no worse than anywhere else. "We actually believe Belgium is not that bad in terms of cost comparison. Indeed, in a recent US study, the average Belgian manager's buy side cost was 31bps, lower than Canada, the Netherlands and Italy."

De Ryck attributes the wide variety of Belgian investment management costs to the fact that around 50% of total pension fund investment is in mutualfunds, to avoid withholding tax, where front end market charges for membership can be high."