During the last few weeks there has been increased talk of the need for a level playing field to be created for comparing fund charges following recent publication of the FCA’s Thematic Review into clarity of fund charges
Since Daniel Godfrey stepped in as chief executive of the Investment Management Association back in October 2012 the issue of finding a way of effectively disclosing fund management charges has been rarely out of the financial trade news.
Now that disclosure associated with pensions and regulated financial advice has been all but sorted out as a result of RDR, fund charges transparency remains one major area where the FCA has not yet arrived at firm rules.
A thematic review (TR14/7) by the regulator however was published last month and both the IMA and the FCA broadly favour phasing out disclosing of annual management charges in isolation. The FCA’s view was that AMCs alone do not provide investors with a clear, combined figure for charges as they exclude administration charges and expenses taken from funds.
A more promising measure is Total Expense Ratios. About a quarter of UK funds today show TERs which include the following costs:
1.AMC
2.Depositary fee
3.Custodian fee
4.Audit fee
5.Registration, regulatory and similar charges
6.Performance fee
Both the IMA and the FCA also appear to be in agreement that the investment world needs to move to what is called Ongoing Charges Figures which takes into account all of the above charges except the Performance Fee.
Although there is broad agreement amongst the trade body, regulator and advisory communities that a more complete understanding of all charges is badly needed, it is clear that to date the fund management community remains divided and inconsistent in their response (to say the least).
Market research providers like Morningstar and FE Analytics are pushing for OCF disclosure on funds they provide data on. However these data providers remain frustrated in their endeavours to provide the desired level playing field by the fact that many firms refuse to put OCF fees into their metadata (a kind of information feed or data stream which is ‘scraped’ by these firms prior to tables being updated). Many fund managers ask them to simply collect OCF information from key investor information documents. This is of course laborious and difficult work which often reveals further data discrepancies.
OCF will in theory tell investors, in pounds and pence per unit, how much profit (or loss) they have made and how much it has cost them – so it comes somewhere near the pensions’ Key Features Illustration Effect of Charges disclosure. However there are still significant gaps of information when you look deeper.
But OCF does not offer entry or exit charges paid directly by the investor. Nor does it include interest on borrowing, brokerage charges or dealing costs. There are even more granular charges associated with transactions such as bid-ask spreads, undisclosed revenue, acquisition costs, custodial charges - I could go on.
