Paid post by Scottish Widows

What is the impact of charges on your clients’ investments?

By Iain McGowan. Head of Fund Proposition, Scottish Widows.

This year has seen investment management charges come under the spotlight.

In this article, you’ll read about how regulatory changes are driving more transparency in investment cost reporting, and what this means for you and your clients.

Transparency has been a key focus for regulators who have been keen to provide greater clarity for investors, reduce costs and increase competition. More clarity on fund charges should enable investors to make better-informed decisions by improving their ability to make comparisons between different funds; while also allowing better analysis of investment fund charges against a fund’s investment aims.

Regulatory change: Part 1

In January of this year, the second round of the EU’s Markets in Financial Instruments Directive – so-called MiFID II – was brought into force. Among its directives, MiFID II sought better transparency on fund fees, both when the fund is sold to the consumer and on an annual basis thereafter.

Previously, only certain costs – those in the ongoing cost figure (OCF) – had to be disclosed. The OCF is stated as a percentage of an investment’s value, and shows the fees for the management (excluding performance fees) and administration of a fund, as well as custody and audit costs. But this method of measuring fees had been criticised for omitting several elements of investment management costs.

MiFID II introduced the requirement for extra disclosure of ‘hidden’ costs. Investment companies now need to reveal all the costs of running a fund, including transaction fees – the cost of buying and selling a portfolio’s investments (paid out to a third-party broker) – as well as related taxes, duties and clearing costs. Performance fees and incidental fees also need to be included.

Regulatory change: Part 2

MiFID II was not the only change to cost disclosure to land in January. The Packaged Retail and Insurance-based Investment Products (PRIIPs) regulations also took effect. These require retail investment products (including investment trusts, insurance-based investment products such as with-profits, structured investments and structured bonds) to produce Key Information Documents or KIDs for the first time. These KIDs need to provide a breakdown of costs, as well as providing an illustration of the effect of costs expressed as a reduction in yield.

UCITS funds already have to provide Key Investor Information Documents (or KIIDs), which include a breakdown of fund charges. UCITS funds are covered by the new PRIIPs regulations but have a transitional period up to 31st December 2019 which allows funds to continue using the old KIIDs during this time.

Regulatory change: Part 3

The FCA is also adding new elements to its regulation of fee and cost disclosure. The new initiatives follow the conclusion of the Asset Management Market Study and aim to improve competition and to ensure fund managers compete on the value they supply.

These initiatives include the requirement for fund managers to appoint at least two independent board directors. Also, fund managers will have to produce an ‘Annual Assessment of Value’ (AAV), as a way for them to bolster the best interests of the fund’s investors. Fund houses have to publish annual statements starting from September 2019.