Bid for more transparency on funds will reduce costs
INVESTORS are driving a new transparency in fund management which should see costs coming down and poor-value funds disappearing.
That is the industry view ahead of the ban from next January on advisers receiving commissions, which is intended by the regulator to improve professionalism and clean up investment advice.
Two fund boutiques, TCF Investment and SCM Private, have been campaigning for fuller disclosure of fund management charges, claiming that hidden transaction and other expenses add significantly to the real costs of many actively-managed funds. The Investment Management Association, however, insists that such add-ons are immaterial or related to performance, and that the total expense ratio (Ter) formula is a true indicator of costs.
The Association of Investment Companies meanwhile has just abandoned Ter in favour of an “ongoing charges” benchmark, which it says anticipates European legislation, but which omits performance fees.
Neither Ter nor ongoing charges include a whole battery of items including entry and exit charges, trail commission, custodian and brokerage costs, stamp duty, and trading costs.
But David Ferguson, one of the participants in a forum on the issue staged in Edinburgh last week by Scottish Investment Operations, says the costs debate is “more of a sideshow”.
Mr Ferguson, founder of Edinburgh-based adviser platform Nucleus where 25% of assets are passively-managed, believes the new regime will create a more investor-friendly landscape where active managers will have to earn their corn.
“The fund management sector has a pretty chequered history in terms of its real engagement with client outcomes,” Mr Fergu-
I don’t know anyone in the market who doesn’t believe there will be consolidation – fund closures and mergers
son says. “It has been good at making money for itself, not quite so good at making money for its customers.”
He says underperforming, overcharging funds will disappear. “I don’t know anyone in the market who doesn’t believe there will be consolidation – fund closures and mergers.”
Colin Mclean, managing director of SVM Asset Management, said trusting index trackers was “investing on auto-pilot”. He warned that passive funds did not contribute towards forming prices through research, or towards the governance of companies, and could therefore leave investors exposed to unknown risks – such as the 2008 RBS share issue.
Mr Mclean said there was a continuing place in the market for “performance-oriented boutiques” with funds rated by the likes of S&P, Morningstar and Citywire, who could also offer options such as SRI (socially responsible investment) funds.
Mr Mclean said: “Advisers and wealth managers have quite an important role to play in managing investor anxiety and helping them understand their approach to risk… a lot of investors are going to be pretty happy with performance fees if they get extra performance.”
But Bryan Johnston, director at Brewin Dolphin in Edinburgh, said many investors were suspicious of performance fees, questioning “quite why managers should receive a double bonus for doing what they are being paid to do”.
He said the new focus on charges was welcome. “I am a great believer in transparency – if the fund you are investing in does what it is supposed to do, you don’t worry too much. We have been a bit guilty in the industry of being a bit opaque.”
Forum chairman Harry Morgan, the former Newton and Adam & Co investment chief now at Thomas Miller Investment in the capital, said: “Fees are on a downward trajectory.”
He said the mood of the forum was that while risk management was a key part of investment management, “too much risk profiling may not add value – most people want the same thing – security and making a bit of a profit”.
The winners from the current volatility would be investment boutiques – which had become easier to establish – and passive funds.
Mr Morgan c o ncl uded: “Charging fees for investment services is a sensible business model. But the industry needs to work towards a Tesco-style solution whereby the product/ service has a clear transparent price. We are getting there, but there is more to do.”