23rd May 2013
A group that campaigns for transparency of fund management charges has created a new calculator to help you and your adviser consider the total cost of investing.
The calculator from the True and Fair campaign, www.trueandfaircalculator.com requires you to enter various costs and fees. It will then will provide you with an estimate of return after those costs and fees.
True and Fair was set up by SCM Private, a fund manager that holds itself out as providing transparent investment products. It uses a lot of passive instruments in its funds, which are obviously low cost and makes much of its low turnover and dealing costs, though asset allocation is managed actively led by veteran fund manager Alan Miller. The campaign and manager have been fiercely critical of hidden costs and dealing charges in the fund sector.
Mindful Money brings you its arguments below. Neither the campaign nor the fund manager exactly hide their light under a bushel. We would say that the fund manager and the campaign do have an agenda which is worth bearing in mind. But if you are focused on costs, that agenda may coincide with yours. Others have different arguments of course. This is a blog from the chief executive of the Investment Management Association Daniel Godfrey on thisismoney.co.uk setting out where he thinks the industry should be heading on costs and how they should be disclosed.
We have taken some of the arguments from True and Fair in italics below.
The True and Fair Calculator will provide users with an estimate of the full effect of charges and other costs on their investment returns, in pounds and pence and as a percentage.
The Calculator is the first tool of its kind globally to offer the following features:
· Enables investors to fully analyse the total costs of all investment products available in the home country, e.g. in the UK
· Has two levels – Standard and Advanced Bespoke – both levels can be tailored but the Advanced level allows more sophisticated and professional users, such as advisers, consultants and trustees to enter data at every level of the investment chain – fund costs, wrapper costs, platform costs and adviser costs
· Gives the user one total cost of investing number, in pounds and pence, as well as a percentage
· Allows users to compare up to three completely different products, side-by-side, for example a Unit Trust, an ETF and an Investment Trust
The True and Fair Calculator is based on data streams from Morningstar and uses a robust reasoned calculation methodology to identify costs and fees based on a series of investment assumptions. In the Advanced Bespoke mode the Calculator allows users to change all entry fields to precisely match their own portfolio structure and performance. It builds on elements of a simpler web calculator developed by the SEC in the US which was used by over one million consumers in its first three years.
The Calculator uses the tried and tested Reduction in Yield (RIY) method which calculates the overall effect of charges on an investment as the difference between the return you would have received with and without costs.
Gina Miller, spearhead of The True and Fair Campaign, and one of the originators of The Calculator said: “We’ve created the True and Fair Calculator to provide UK consumers with a free public information service giving details of the investment fees and costs they pay, so they can make better informed decisions prior to purchase. When we launched The True and Fair Campaign 18 months ago, 92 per cent of the public said they wanted to know the cost of their investments in one number. This tool allows them to do exactly this.
“We hope this drives new levels of cost transparency which results in greater competition among product providers, gives information to aid better decision making by consumers and their advisers and provides a foundation for more realistic investment expectations. Ultimately it should result in better consumer protection.
“Those firms offering good products, that deliver strong performance at competitive fees, will presumably welcome the fact that consumers will have the ability to clearly see the value that their products deliver via the Calculator. We look forward to these companies endorsing our initiative and hosting the True and Fair Calculator on their websites.
“Some providers will have to reform their practices or consumers will vote with their feet. Companies offering poorly performing products that charge large, hidden fees have no place in a modern financial services industry.
“The US has had a similar calculator since 2005 and we believe there’s no reason why UK savers should be treated as second class citizens compared to their US counterparts. We want to see the UK re-established as the gold standard for transparency, and for trust in financial services products and providers to be rebuilt, and to do this we must prevent another generation of investors sleep walking their way into buying inappropriate investment products. The Calculator has the added bonus that future profits will go directly to benefit financial education and care for the elderly, something we are also passionate about.”
Anyway, Mindful Money thinks it may be worth checking out the calculator to see how it applies to your portfolio and funds though you may have to do some digging to get all the information from your fund manager/s. So maybe the campaign has a point.