Opinion  

Let’s pause to see whether pounds and pence works

John Kenchington

The regulator has been advised by its top consumer protection body to come down like a tonne of bricks on the fund industry’s charging practices.

The Financial Services Consumer Panel (FSCP) has mooted a new single-charge mechanism where funds are permitted to take one clear fee from investors to cover all investing costs as well as the fund house’s revenues.

What’s really being questioned here is the current ease with which fund managers can pass on the costs of running their funds to their customers. They currently lift costs for administration, custodians, stamp duty and trading directly out of funds’ pools of capital.

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Some commentators have put about confusing misinformation lately, such as suggestions funds are secretly skimming billions of pounds of investors’ money without them knowing.

That’s wrong. These ‘hidden’ charges are paying for fund and investment services; they are not going to fund managers.

I don’t think there is a big conspiracy or scandal – but there are some serious problems.

Fund managers aren’t controlling trading costs tightly enough and that hits investors’ long-term returns. The FSCP is right to condemn rip-off ‘closet tracker’ funds that don’t justify their charges and we’ve been exposing these funds for years in Investment Adviser.

Earlier this year the FCA warned the industry’s haphazard use of multiple fee figures was unclear, while the prevailing ongoing charges figure didn’t express all costs.

Trade body the IMA’s answer is a ‘pounds and pence’ figure for how much exactly has been spent in fees per each unit of a fund, which all funds will have to publish from next spring.

It will include everything apart from the margins stockbrokers make within their ‘bid-offer spreads’, which are considered trading costs.

Brokers often sell assets at slightly over the odds, making profits on the difference. It is in fact very difficult indeed even to estimate the effect of this on investors’ returns.

The FSCP’s single-fee proposal couldn’t prevent these bid/offer effects from existing, but it could create a disturbing conflict of interest, because, as the IMA points out, it would disincentivise managers from trading if they had to pay trading costs.

That might prevent them from doing their best to deliver returns, giving rise to zombie funds that failed to act in the face of threats or opportunities.

Bizarrely, the IMA’s pounds-and-pence plan wasn’t mentioned in the FSCP’s discussion paper. But it will mean investors can see the full costs of funds – and that will encourage fund managers to tighten their belts.

So let’s come down on the closet trackers and strengthen the requirements for funds to manage their costs well. But let’s also wait and see if ‘pounds and pence’ works on charging. We can always go nuclear later if it doesn’t.