18th October 2016 by Lee Robertson
The subject of fees, particularly those that are not readily identifiable in fund charging structures, is one that continually appears in industry discussions. There has long been a debate about what the effect of these charges are and how they impact upon an investors expectations of returns.
Explicit fees are obviously those that are readily identifiable and those that are not are termed implicit fees.
As an adviser dealing primarily with private clients this is a subject which has to be covered in great detail. However, by their very nature these implicit fees are hard to discuss in any great detail or with any great accuracy but it is imperative and entirely right that investors have a good grasp of the types of charges that are being applied to their capital and when, how and why they are levied. It must surely be right that the fund groups which wish us to purchase their funds on behalf of our clients should help us ascertain the true cost of their purchase.
Active funds beyond their explicit fees have many different fees that impact on the potential returns available to investors. Transaction fees, in, out and dealing, hedging costs, custody, spreads, taxes, research costs, swaps costs, foreign exchange costs and a host of other ‘frictional’ costs can make a rather large dent in returns, particularly on those funds with high portfolio turnover rates (PTRs).
High PTRs are particularly prevalent in highly liquid equity funds with large spreads and with a requirement for a great deal of research, something that investors are usually paying for even if they don’t realise it. Star Manager, Neil Woodford, has recently made headlines by announcing that he will no longer pass on his research costs to his investors but to be fair his funds tend to have a low PTR as he is more of a buy and hold type of manager.
Those supposedly active funds which tend to track their benchmarks are a prime example of much of what is wrong with the current system. These are really just ‘closet trackers’ but unfortunately for the investors in these funds they continue to charge both explicit and implicit fees whilst not making any real or measurable effort to actively seek to add alpha. There are many who believe that there has been a marked upturn in these closet trackers and this is not at all good for the investor.
It is not all bad news however, Europe has been pushing hard on full fee disclosure with new rules by 2018 and Norway has recently cracked down hard on closet trackers with a requirement that those fund managers who have diverged away from what their investors were led to expect by index tracking whilst continuing to charge active fees refund fees and inform their investors of the decision of their regulator. Perhaps unsurprisingly, this has not proven as popular with the fund groups as the investors.
Here in the UK many fund groups are now acknowledging that the direction of travel for full fee disclosure, despite the difficulties in achieving this, is towards much more transparency. Martin Gilbert, the big boss at Aberdeen Asset Management, is one of the heavyweights now being very vocal about the need to have a single, all-inclusive fund charge making it easier for investors and their advisers to really get to the bottom of the types of charges being levied on an annual basis.
So as an adviser, Brexit and fund managers’ trade body the Investment Association foot dragging notwithstanding, I am keen to see the new rules and disclosure impetus coming in by 2018. I want to be able to have a full, frank and fair discussion with my clients on those costs which allow them to ascertain their true returns and plan for their financial futures with a much greater degree of certainty than is currently the case.
Lee Robertson, chief executive officer, chartered wealth manager, Investment Quorum