True and Fair slams IMA over costs disclosure

1st December 2014


By Tony Levene

The issue whether fund managers, good, bad or indifferent are paid too much has been around for years, but it will not go away. Last month, the Financial Services Consumer Panel (FSCP), an advisory body to the regulator the Financial Conduct Authority, published a report detailing a “largely unchallenged” industry, which has changed little (and only when forced) and which overwhelms small investors’ best interests.

The Investment Management Association, which represents unit trust managers, responded promising to “work with the FSCP in developing our proposals for simple and comprehensive disclosure so that consumers will be able to have confidence that investment managers live up to these very high standards.”

But today that IMA reply is accused of “being disingenuous by issuing false statements” by the True and Fair Campaign, the group organised by platform SCM which campaigns for lower fund management costs.

True and Fair‘s Gina Miller says she is “outraged by the industry mouthpiece’s (IMA) response to the recent damning Financial Services Consumer Panel (FSCP) report ‘Investment Costs – More Than Meets the Eye.” She has launched a scathing attack on the IMA, claiming “it is misleading the public, regulator, politicians and journalists.”

The charges issue has become more important – and potentially more toxic for fund managers – as pensions auto enrolment gathers speed. This will bring in millions more as potential fund management company consumers. But as funds will be selected by employers who may not have the knowledge or experience to understand the importance of costs, or the market clout to ensure a better deal, individuals could end up with disappointing results, leading to more disenchantment with pension savings.

Six areas to question

True and Fair highlights six areas where it claims the IMA is being economical with the truth, based on a statement from Daniel Godfrey, IMA chief executive.

Godfrey said: The IMA’s purpose is to make investment better for investors and a key part of that is to make it as easy as possible to understand the cost of investing and how this affects returns. Although cost disclosure by UK funds is already very detailed and comprehensive, it also needs to be understandable. This is not a simple task and success has eluded both regulators and the industry for many years.

“But the IMA has now developed a new measure that tells consumers, in pounds and pence, exactly how much a unit in a fund grew over the course of a year and how much it cost to achieve that performance. Every penny spent by the fund is included in this figure and so it provides a simple, accessible, all-inclusive measure of all costs. Nothing is hidden and nothing is left out.

“Pounds and pence disclosure goes beyond any regulatory or legal requirement and is a big step forwards for consumer understanding. We expect it to be in place next spring, but there is more to do. The IMA is working on ways to measure and explain the significance of both portfolio turnover and spread and the part they play in returns. The IMA will also amend our codes to require clear and simple disclosure of research costs where these are met from dealing commissions paid by funds.”

So what’s wrong with that?

These are the reasons that True and Fair demands more clarity and more disclosure.

  1. The new measure is NOT ‘in pounds and pence’. It is a % per unit figure which has not been converted into pounds and pence. Consumers will need to know how many units they hold in order to convert this into any meaningful pounds and pence figure.
  1. The new measure does NOT show exactly ‘how much it cost to achieve that performance’. Transaction costs or performance fees are shown separately rather than included in the reported ‘operating costs’. Fundamentally, it does not include the element of transaction costs known as spreads which can be an additional 85% of the total costs within funds4. It also completely excludes ALL transaction costs within a fund held by another fund (known as a “fund of fund”).   The new measure is therefore NOT showing ‘every penny spent by the fund’.
  1. The new measure is NOT ‘simple’ The table contains 13 different numbers, 14 if the fund has performance fees. To work out the actual cost in pounds and pence requires the operating charges to be added to the disclosed ‘direct’ transaction costs and the performance fees, and then the undisclosed ‘indirect’ transaction costs to be calculated by the investor themselves, and then converted into pounds and pence by multiplying the number of units held.
  1. The new measure is NOT “accessible’. The IMA has indicated their disclosure will be within a fund’s annual statements. These statements are usually received by investors 12 – 18 months AFTER they invest and few investors ever look at these statements anyway.
  1. It is FALSE that ‘nothing is hidden and nothing is left out’ As stated in point 2 above, the IMA’s proposed solution leaves out up to 85% of the overall transaction costs according to recent CASS Business School research and has not even bothered to add up these costs or many other costs to produce a single reported number, or converted this number into a consumer understandable pounds and pence charge; we therefore challenge that it is a “simple, accessible, all-inclusive measure of costs”

6.   It is disingenuous for the IMA to say that it is ‘working on ways to measure and explain the significance of both portfolio turnover and spread and the part they play in returns’ when it was the IMA itself that stopped its members having to report fund turnover in June 2012. Two years later and they have not proposed a definitive measure. Furthermore, the IMA apparently wants to put in meaningless statements in factsheets that the fund turnover was ‘High’ or ‘Low” with no proper quantification of the cost.

Miller adds: “This independent, academic report confirms what the Campaign has been saying for three years and notable esteemed academics and commentators have been saying for many more years.”

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