InvestmentsMay 27 2014

IMA hits back at claims it allows costs to remain hidden

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New fund charge requirements set to be brought in by the Investment Management Association will not “cover every penny spent by a fund”, the Pensions Institute at Cass Business School said in a white paper published today (27 May).

The institute’s paper comes despite the Financial Reporting Council accepting the IMA’s proposal to report not only the ongoing charges figure, but also all the dealing costs and stamp duty paid when an investment manager buys and sells assets in the fund’s portfolio.

Yet today (27 May) the Pensions Institute has hit back at the IMA’s assertions that charges will be made clear under these new requirements and claims even with new information reporting rules “there will remain costs that are hidden”.

But Daniel Godfrey, chief executive of the IMA, said the recommendation for his organisation’s members to use the OCF rather than the annual management charge was only the first stage of improving transparency.

He said the OCF was “forward looking, uses a standardised methodology and provides the best indicator of the charges a consumer will pay for the fund.”

Mr Godfrey said: “We would encourage the entire market, including the media, to refer to the OCF.

“The second stage has been the pounds and pence per unit disclosure of all costs paid by a fund, including all direct transaction costs, in the context of performance.

“The third stage is to look further at how to account for indirect costs, and also to reach a consistent basis for the calculation and disclosure of portfolio turnover rates so that clients can better understand the relevant investment processes.

“The fourth stage is an ongoing review of existing disclosure codes to ensure that specific, costed disclosure is made to clients of the split in dealing commissions between execution and research.

“These three stages are all based on historic accountability (ie. looking backwards to explain costs incurred).”

This follows a FCA review into fund management charges, published earlier this month, which found that the majority of firms in the industry are still not communicating charges clearly enough to investors.

The FCA reviewed 11 asset management firms from a variety of backgrounds, such as independent asset managers, banks and insurers.

It found that many firms were still using the annual management charge in marketing material, using different charges in different documents and making it difficult for investors to understand the full costs and compare those costs with other funds.

Research cited in the Pensions Institute paper suggests that concealed costs - such as bid-ask spreads and transaction costs in underlying funds - can make up to 85 per cent of a fund’s total transaction costs.

The remainder is taken up by visible costs such as commissions, taxes and fees.

Professor David Blake, director of the Pension’s Institute, said: “No good reasons have been put forward for why all the costs of investment management should not be fully disclosed. They are after all genuine costs borne by the investors.

“There is little point in requiring transparency where the reported measure for ‘costs’ does not include all of the costs, or in the short-term, as many costs as could currently be reported on an efficient basis.

“If total investment costs are not ultimately disclosed in full, how can there ever be an effective and meaningful cap on charges, and how can active investment managers ever asses their true value added?”

Costs could be reported in the form of a ‘rate of cost,’ the reports claims.

The ‘rate of cost’ could be deducted from the gross rate of return to give a net rate of return - and as a monetary amount, which could be compared with the monetary value of the investor’s portfolio.

The paper suggests a staggered approach could be taken in the lead up to the full disclosure of all transaction costs.

In the initial stage, the institute argues investment managers should be required to report all visible cash costs involving commissions, taxes, fees, custodial charges and acquisitions costs, together with the hidden cash costs of bid ask spreads, transaction costs underlying funds and undisclosed revenue.