European investors are paying twice as much in distribution fees for mutual funds as investors in the US, according to a ground-breaking study of European fee levels that examined funds based in Dublin and in Luxembourg.

Retail investors buying equity funds also appear to be paying 2½ times as much for the services of an intermediary as those buying money market funds, despite there being little or no difference in the inherent cost of providing these products.

The research by Lipper, the fund data provider, is believed to be the first detailed analysis to shine a light on the murky world of European distribution fees, paid by asset managers to the banks and financial advisers that disseminate their funds, but ultimately paid for by investors.

More often than not, these fees are bundled up in the annual management charge levied by funds, meaning they remain opaque.

However, Lipper's analysis suggests these hidden fees are a key reason why total expense ratios (TERs) paid by European investors are much higher than in the US. "The distribution fee can be a determining factor in what the TER is. It's the distribution fee that is driving the TER level," said Ed Moisson, director of fiduciary operations at Lipper.

Lipper used two approaches to determine the levels of pan-European distribution fees.

First, it looked at the minority of funds that are transparent about their distribution fees in their accounts - namely 2,470 Luxembourg- and Dublin-based vehicles, about 15 per cent of funds domiciled in these jurisdictions. It found that the average distribution fee charged by a retail equity fund bearing an initial fee was 0.56 per cent a year.

For funds without an initial charge, this figure rose to 1.04 per cent, with about 8 per cent of funds charging more than 1.6 per cent a year for distribution. Bond funds were a little cheaper, with fees for money market vehicles just 0.33 per cent and 0.76 per cent with and without an initial charge respectively.

However, Lipper had reason to conclude that typical fees across Europe vary more widely still. Starting with an assumption that institutional share classes do not bear distribution fees, Lipper looked at Luxembourg- and Dublin-domiciled funds with multiple share classes that do not disclose their distribution fees.

Using a second assumption - that the difference in annual charges between the retail and institutional share classes is accounted for by the distribution fee - Lipper estimated that distribution fees for equity funds (with initial charges) average 0.65 per cent, those for bond funds 0.4 per cent, and those for money market funds 0.26 per cent.

Comparing this with the US, where it is a legal requirement for promoters to disclose the fees paid to distributors, Lipper concluded that European investors pay twice as much to intermediaries as their US peers for front-end loaded funds; 0.64 per cent for European equity funds against 0.3 per cent in the US, and 0.53 per cent for US equity funds, against 0.28 per cent in the US.

Although management charges are also higher in Europe than in the US, the analysis suggests that higher distribution fees are typically the largest single reason why TERs are higher in Europe for front-end loaded equity funds. However, for funds with no initial charge, distribution fees only appear to be about 10 basis points higher than in the US.

Lipper accepts that language barriers and the lack of a genuine single market partly explain why fees are higher in Europe, but it believes that transparency can help reduce excess fee levels.

"Greater transparency will put pressure on fund management companies to justify their distribution fee levels," said Mr Moisson.