The results, released yesterday (May 13), show that of the 11 firms of varying sizes and business models reviewed (a sample the FCA says covered 29% of the UK retail market by assets under management) seven firms “failed to provide investors with a clear, combined figure for charges”; seven of the firms also had charging structures and information that were “likely to be less than clear to investors”; six firms made the charging structure unnecessarily complex by using administration charges “that did not correspond to specific administration costs or adding performance fees”; while three firms presented clients with an unclear description of administration charges.
All in all, it was a rather dismal performance. And, the implications are that a great deal of work still remains to be done if investors are ever going to be easily able to compare one fund’s costs with another.
The next step
In order to mitigate the findings of the report, the FCA has urged fund managers to be consistent in their various literature and to use one single cost number, ideally the ongoing charges figure – a number that replaced the total expense ratio in 2012 – instead of the annual management charge (AMC).
While it didn’t go quite so far as to say that the AMC should no longer be used, it did say that “using the AMC as the headline charge figure on marketing material does not provide investors with a clear, combined figure for charges as it excludes additional charges and expenses that are taken from funds.”
These additional ongoing charges, it said, can add significant amounts to the cost of a fund – in some cases as much as 0.9% over and above the AMC.
The Investment Management Association took a slightly stronger line, saying it has long advocated for the exclusive use of the OCF in marketing literature because it provides a common standard for all known costs and charges that a fund will bear.
IMA CEO, Daniel Godfrey, pointed out that this is in stark contrast to the AMC which is, at best, a poor basis for comparison, and at worst a “poor reflection of total cost”.
Godfrey called on all market participants to abandon all use of AMCs in marketing material and, instead to replace them with the OCF.
Adding, ““Consumers need information that ensures they get a complete picture and that they can fully understand. And this needs to apply across all products and all distribution channels. I’m grateful for the FCA’s support and we look forward to working with them to get to the right solutions for consumers across the board.”
Gina Miller, founder of the True and Fair campaign, agrees that consumers need to get a full picture of what they are getting, but believes that the FCA review does not help in this regard.
Calling the review a hugely disappointing piece of work, she told Portfolio Adviser, that it didn’t go anywhere close to far enough toward improving consumer outcomes.
“They haven’t improved anything with this, all they have done is shift responsibility for this part of it to the IMA,” she said.
Where to from here?
While the calls by the IMA and the recommendations by the FCA should see a move toward more consistency in marketing literature, as is evidenced by the poor performance to date, such consistency may take a rather long time to achieve. And, even then, there is still some debate as to what metric to use. Until then, we are still pretty far away from the ideal scenario of a single number (on which everyone can agree) that can be used to easily compare one fund with another.
As Mark Dampier, head of research at Hargreaves Lansdown, told Portfolio Adviser, “Transparency is important but, as an investor, I don’t need to know what the tea lady is paid. All I want is to be able to compare fund A with fund B and see clearly which costs more. At the moment, you can’t do that.”
That seems a fairly reasonable request, so perhaps a better question than, does this review go far enough, is why does it all seem so hard to change?
Are there any funds that, in your view, have a particularly complicated manner of displaying their costs?
