The Investment Management Association’s proposal for a new system to highlight the impact of costs on the performance of an investment fund has been broadly welcomed, although some advisers are sceptical about how many fund groups will sign up.
The new disclosure regime aims to offer simple and clear information on the total costs of a fund. It will require fund managers to calculate the average number of units in issue on a daily basis over a year and divide that by the total costs.
The IMA says this will give a decent approximation of all the costs, including broker fees and stamp duty, incurred. This could then be put into the context of the overall performance of the fund (see boxout for fuller explanation).
The trade body hopes the new disclosure regime could be introdcued by the end off 2014. It does not have an estimation of the number of members likely to sign up but highlights that 90 per cent of members signed up to earlier increased IMA disclosure guidanceagreed last summer.
Kames Capital head of retail sales Steve Kenny supports the move and agrees that greater transparency is required.
He says: “Any move that helps the consumer understand what they are paying for is positive as the industry does offer good value and it is essential we have the trust of intermediaries and end clients. I do see the UK moving more to the US model where the price quoted is the Total price or the TER – so the consumer knows exactly what the cost is going to be.”
Henderson also supports the IMA in its attempts to improve disclosure. A spokesman from Henderson says: “We have done significant work to meet the new disclosure requirements that came into effect at the end of March which should assist investors in understanding the costs associated with their investment.
“We welcome the opportunity to discuss further developments in this area and more broadly with other stakeholders in support of the IMA’s approach to greater transparency.”
AIC communication director Annabel Brodie-Smith also welcomes the initiative. She says the IMA must keep the costs disclosure as simple as possible and present it as a monetary value “because people can relate more to pounds and pence than a fraction of percentage”.
Brodie-Smith adds that the AIC will need to work with the fund management industry to see how the regime will apply to investment companies. She highlights an initial distinction in calculating exact costs, as there is a lot of share price volatility in investment companies.
Hargreaves Lansdown is also backing the new system. Chief executive Ian Gorham has written to the chief executives at a number of the leading fund management groups suggesting they consider Godfrey’s proposals.
He says: “It is an opportunity to reform cost presentation to make it simpler and more comprehensive. The UK public should invest more and investing in funds is a great option for a starting retail investor. The more a product is simple and trustworthy, the more likely people are to be attracted to invest in it.”
Gorham says the IMA’s work could be the first stage of a move to create a “single, all inclusive total cost figure” including advice and paltform charges which would be easily understandable to the general public.
Murphy Financial associate partner Adrian Murphy agrees that more transparency in the fund management industry is needed, but is doubtful that the industry will fully cooperate.
He says: “Fund management is the one area that remains outstanding in terms of transparency and I can anticipate that at some point the FCA will have to look into it fairly heavily. Everyone else’s costs are now explicit and fund management is still opaque. However I would be surprised if all of the fund management industry supply data.”
Worldwide Financial Planning IFA Nick McBreen argues the system may put too much emphasis on cost. He says: “The push for transparency of charging in any investment is a consumer driven issue and there is nothing negative about that, but unfortunately the momentum right now is the price of everything and the value of nothing.”
One potential criticism of the system that Godfrey admits to is the fact that the method does not cover initial or exit costs. However, Kenny says both do not carry nearly as much importance as issues with ongoing costs.
Q&A on the IMA’s new disclosure plans
So, what is the IMA proposing?
It would require fund managers to calculate the average number of units in issue on a daily basis over the year and divide that by the total costs. The IMA says this will give a decent approximation of all the costs, including broker fees and stamp duty, incurred. This could then be put into the context of the overall performance of the fund.
The IMA gives the following example of how the information could be presented:
“You held 3,456 units on January 1, 2012 with a value of £4,320. On December 31, 2012, you held 5,140 units with a value of £6,939.
“For a unit held throughout the whole year, the price went from £1.25 to £1.35, a rise of 8 per cent. The total costs for a unit held throughout the year were approximately 2.5p per unit. The costs were equivalent to a quarter, or 25 per cent, of the growth in the value of a unit.”
How does this compare to the disclosure campaigns from the likes of the True and Fair Campaign?
The True and Fair Campaign was launched in February 2012 by former New Star chief investment officer Alan Miller and backed by his wealth management firm SCM Private.
It has been calling for a single figure encapsulating all the costs paid for by investors, including dealing costs and stamp duty, which are often not made clear to them. David Pitt-Watson also wrote an influential report last year calling for all investment costs to be set out to investors clearly on an annual basis.
The IMA’s plan should go a long way to addressing these concerns. The figures will be an average of fund costs over a year, rather than personalised to the investor’s holding period, but will offer a good indication of total costs.
The figure will be historic, as costs change all the time, but then so were the proposals of Miller and Pitt-Watson. The IMA’s plans should also dove-tail with the ABI’s work on cost disclosure. Many pension firms have previously pointed to the fact they cannot offer a true cost figure to customers if the underlying fund group cannot supply such costs.
Are all fund groups likely to sign up to this new disclosure regime?
The IMA say they can’t put a figure on how many groups will sign up. The trade body says it is hopeful the majority of members will participate and points to the fact over 90 per cent of funds are signed up to the enhanced guidance on disclosure the IMA introduced last summer. The IMA hopes the new regime will be in place by the end of 2014.