There is lots of heated discussion about the cost of investment management. Some of it is dis-informative and over-emotive hyperbole. But it has certainly been the case that the industry and regulators could do a better job of explaining the costs involved in investment management, what they are for and how to judge whether they represent value-for-money (not just whether they are cheap).
The Investment Association’s objective is to provide a complete picture of all costs involved in the investment process expressed in terms that users can actually understand.
Some of this work is already complete with the introduction of a new requirement for UK authorised funds to disclose comprehensive pounds-and-pence-per-unit cost figures. This includes all management, operational and transaction costs and is based on the audited information in the fund’s Annual Report & Accounts. The manager, the media and data providers can easily extract this data from the Accounts, giving investors a simple, all-inclusive measure of every penny spent by a fund that they can compare to the unit’s performance.
SCM: At long last Mr Godfrey has finally admitted their proposal is per unit, not a total cost one number. So investors have to work out the figures themselves. Fund companies know who owns their fund so why can’t they work it out properly?
It is a lie to say that it includes all transaction costs as this excludes the spreads. Furthermore it is not added up. These accounts are NOT readily available on-line for many fund groups – another lie.
IA: But we always recognised that capturing all the cash costs involved in delivering a fund’s historic performance, albeit a critical element in delivering accountability for costs, was only the first step on a journey.
To understand the way in which we have built our proposals, it is important to understand the principles that lie behind them:
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Disclosure must be understandable by the person who receives it
SCM: The proposed fund disclosure template we have seen is incomprehensible – up to 14 numbers - not even added up.
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It must be comprehensive (nothing hidden and nothing left out)
SCM: But it excludes a large amount of the transaction costs, adviser fees, platform fees and many other charges. They have base their wholly biased argument on a transaction cost analysis of just 10 funds – they haven’t even said who the ten funds are so we can’t tell if they have cherry picked ones to suit their argument – Lies, Damn Lies and IA Statistics.
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Actual past costs and estimates of potential future costs should be kept separate
SCM: Total fudge. The best guide to the future re costs is what happened in the past. The IA would rather people only knew their cost after they invested since by then it’s too late. We have always said they should use the last three years and smooth the data.
Showing costs after purchase does not afford greater consumer protection due to high switching costs and investor inertia.
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Operating costs are qualitatively different from transaction costs – the former happens if the manager does nothing, the second is incurred by the manager in trying to deliver returns and is entirely dependent on trading velocity, timing and efficiency
SCM: Total nonsense. This ignores independent academic research on the subject over many decades. A cost is a cost is a cost. It is not for the IA to decide / cherry-pick which costs investors should see.
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Implicit costs (such as spread and market impact, where cash does not leave the fund) are qualitatively different from explicit costs and should not be co-mingled (although they should definitely be explained and disclosed)
SCM: Regarding spreads they are part of the transaction cost, the fact that the IA has encouraged these costs to be hidden for many years does not make it right not to show this together with the other elements of transaction costs (taxes & commissions) in one number. Anything else is pure deception.
IA: In some areas, such as how to calculate Portfolio Turnover Rate, we are asking for feedback on proposed methodology. In others, such as the calculation of typical portfolio spread, we are looking for feedback on options and for fresh ideas.
SCM: The US has had a perfectly workable and fair definition of PTR since 2009. The IA stopped funds reporting their PTR in July 2012, but have not replaced it with a definition as yet. They should just copy the US definition and stop kicking these issues into the long grass.
IA: If anyone can show us a better, more comprehensive way of disclosing costs, that will be understandable to consumers than we describe in our paper, we’re up for it.
SCM: True and fair have proposed one three years ago – including a user friendly label that can used across all products, as well as built the True and Fair Calculator which has had over 70,000 visitors. Yet no one in the UK industry had debated or disputed our proposals. In Europe they have taken it very seriously.
The IA/FRC SORP is a cost disclosure that breaks virtually every single accounting standard. Under several Freedom of Information requests the FRC have refused to show the communications between the IA and the FRC that produced such an inept attempt at proper disclosure, presumably because they have something to hide.
IA: But we think that our proposed models of disclosure and accountability, both forward and backward, looking would meet the objective of comprehensive (nothing hidden) and understandable information that will help consumers make better decisions.
SCM: Pure flannel - how can consumers make better decisions if the full cost is not clearly set out at the point of sale rather than partially displayed in a statement received up to 12 months after investment? The disclosures are not even added up or converted to actual £ and are therefore less than useless.
IA: We think this will avert a continuation of the trap we’ve all fallen into over the last twenty years with disclosure that nobody understands at best and which can be misleading at worst with spurious assumptions of accuracy being made that could lead to real consumer detriment.
SCM: These proposals fall far short of granting consumers their basic rights to know how much they are paying, in a timely and understandable fashion before they invest. This nonsense is all good for a slick IA Press Release but does nothing to help investors. The IA should start insisting on members reporting all the costs, in one number to comply with MiFID II text of all costs ‘aggregated’ – does Mr Godfrey need a dictionary so he can look up the word ‘aggregated’?
IA: Our proposals provide building blocks that could be transplanted across all investment products, and used by IFAs and platforms to help them provide individual statements to clients that they can actually understand.
SCM: How can they be used as a building block if they do not include ALL the costs? Any house built of IA bricks would be based on shaky foundations - One puff and it would come crumbling down.
IA: Daniel Godfrey
Chief Executive, the Investment Association
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