There is now far more information publicly available on funds, classified across a multitude of fund categories in terms of investment type, style and mandate, as well as risk parameters.
This did not happen easily and mostly came about through regulatory interventions that required better and more consistent disclosure.
And as in any industry, there are some fund managers who are more transparent and consumer-minded than others.
Why is transparency in funds a necessity?
There should be no question about the need for clear and unambiguous information in fund documentation.
For retail funds, it is important for this to be in a consistent format and in plain language that is likely to be understood by retail investors, allowing for comparisons against investor needs and competitor offerings.
UK investment managers are responsible for more than £7.7 trillion in assets under management, of which circa £1.1 trillion are managed in UK retail funds.
The decisions to invest in these, whether taken directly or in consultation with an adviser, are inevitably based on the funds’ documentation, rating agencies’ views, as well as accreditation by fund platforms.
Hence, retail investors and financial advisers must be able to fully understand the products they use, and funds they are invested in.
Although disclosure is generally better than before, it is still pretty much a very challenging if not impossible task for retail investors to look through the documents and know exactly what they are getting in terms of potential capital growth or income and at what cost, and to understand the risks they are potentially exposed to.
The drivers behind improved transparency
The need for clear, concise, unambiguous information is of course not a new debate.
The Plain English Campaign for example was launched in 1979, advocating against the use of jargon and “gobbledygook” in public documents to enable people to have access to clear, concise information.
To date, there are 23,000 documents from 1,600 organisations that carry their “Crystal Mark” for using clear language. Although meaningful, this remains a small drop in the ocean.
Perhaps this best explains the difference between voluntary change and enforced regulated change.
Industries typically do not easily change themselves and like to maintain the status quo as long as possible – the fund management industry was (is?) no different.
Hence the main driving force behind the improvements in disclosure over the past number of years was the regulator, in the form of the FCA and ESMA for UK funds.
Increased regulations and industry reviews over the past decade have greatly influenced the levels of disclosure, mostly for the better.
RDR (in the advice space), MiFID II and PRIIPs (funds and products), the Asset Management Market Study, and the Platform Market Study, to name a few, resulted in far reaching changes to laws and regulations governing the fund management world.
Consumer protection, better governance and market conduct, as well as ensuring a competitive market remain the key driving forces behind many of these interventions.
Hence, all of these regulatory interventions focused to some extent on the need for more consistent disclosure…of investment goals, underlying allowable investments, target investment outcomes and time horizons, the intended investors/target market, risks, volatility and liquidity.
And of course, an increased focus on fees and costs, with a view of ensuring better value for money for investors.
Others are now adding meaningfully to improving transparency.
The challenge of multiple regulations
Still, there remains questions about the adequacy of “transparency” of fund managers. Why is this?
The broader investment industry is a diverse and complicated, often opaque space.
There are many different investment choices available, and various ways in which to invest in them.
Given this complexity, there is a multiplicity of disclosures and documents often with prescriptive, standardised formulaic disclosures, that is complex to understand and difficult for clients to navigate through.
And this is despite the longstanding focus on plain language, and the regulatory focus to ensure more concise and consistent disclosures.
For example: Calculated fee disclosures, while intended to be standardised, can still throw up anomalies which makes like-for-like comparisons difficult for the end investor.
Granularity in fee disclosures can also be unhelpful for retail clients who may not be aware of the roles of the different service providers and who are much more interested in overall costs.
When the FCA published its key findings following their review of MiFID II costs and charges disclosures earlier in 2019, the report stated that “many firms raised concerns about the contradictory or conflicting disclosure rules¹” in UCITS, PRIIPs and MiFID II regulations.
“Too much” information in multiple documents could result in this being ignored and may result in some people not investing at all, as it seems too complex to understand or to compare between various products.
This is potentially the worst long-term outcome for consumers.
What is needed though, is some level of harmonisation of disclosure requirements across the various regulations and different regulators to ensure more clarity for retail investors.
Is there a negative side to too much transparency?
Hence there are questions about the helpfulness to consumers of too much.
For example, some argue that full disclosure of underlying investment holdings could expose a (large) fund to hedge funds that could negatively impact a fund’s value and therefore returns to retail investors, or potentially give away a fund manager’s competitive advantage.
It has become easy to replicate funds, which could deliver returns close to “star” funds, without the costs required in terms of experience, capability and research efforts.
And could too much disclosure lead to a level of technical complexity and detail that is unhelpful to retain investors?
On the other hand, regulations and practice guidelines are focussed on delivering transparency as far as possible in a consistent easy to understand framework.
In a retail context, there cannot be too much transparency, as long as this is delivered in a way that aids understanding and better decision making and does not lead to gobbledygook fine print.
The need for professional advice
Investments and savings are complex, with many fund options, product wrappers (with tax consequences), and available via a wide range of life and investment platforms.
Increased disclosure and transparency require receptive and knowledgeable target audiences.
Hence, it is very important that retail investors should have access to good financial advice and guidance.
But access to advice is not so easy for many retail consumers, perhaps the one negative outcome of RDR.
Whilst transparency in fund literature (on costs and all other investment matters) will help, the advice conundrum must also be addressed to ensure this is more readily available to smaller retail consumers.
Navigating the future
In summary, there is already good disclosures in place on retail funds.
The risk is of course that the technical disclosure is accurate as prescribed, but that warnings are not clear enough or properly considered and understood.
Hence, it needs to be backed up by sound financial advice, and good financial education, to ensure the information are used to best effect in the interests of (retail) investors.
Ferdi van Heerden is chief executive of Momentum Global Investment Management
