As clear as a frosted window – the IA on charges (again)

'You're doing a little better since we deworsified your portfolio.'The Investment  Association (IA) have published another paper as their contribution to the ongoing debate on what the public and their fiduciaries should know about their funds. The paper fails on a number of levels

1. It ignores the fact that the FCA are far enough down the road to statutory disclosure to make this paper all but irrelevant

2. The paper continues to downplay the role of  fiduciary (IGC and Trustee) and hide behind the lack of comprehension and disinterest of consumers as an excuse for inaction.

3. The paper is appallingly written (if the IA are to act for consumers then they will need to find a language that normal people speak) 4, The central argument of the paper, that we should treat transaction costs separately from the fixed costs borne by members of the funds is flawed.

Context

This paper is only one in a long line of initiatives from the IA, designed to take back control of the price we pay for our funds. The fundamental conflict is still not addressed. In a world of 13 shades of intermediation , the costs of fund management are either too complex (for the consumer to analyse) or too great (for a fiduciary to stomach).

The IA’s argument is to keep these costs locked in a cupboard, the keys of which need to be requested. So the IA are the authors of their own proposed accounting standard, they determine the way costs are presented and they determine the rules regarding the minutiae (for instance the bundling of research into transactional costs). The IA are now trying to ride a wave of popular discontent with European intervention by setting their new position (which is pretty much their old position) as a bold move to stand up to Brussels.

Weirdly, this is not an occasion that any sensible person would disagree with Brussels. Indeed the FCA and Brussels are for once as one both in the ways and means of charge disclosure. By courting an unlikely alliance between the fund managers and their consumers against the UK and European Regulators, the IA are walking on quicksand. Unlike King Canute, they may not even get as far as contesting the waves.

Who is the consumer’s champion?

Consumers employ many intermediaries between them and the direct purchase of an asset. The fund manager is only one, though he has the major role of controlling most of the costs incurred within the fund. Other intermediaries are advisers, trustees, IGCs, insurance companies and platform managers.

These “other” intermediaries, if they have value, are paid to ensure that members of the funds get value for money. Very few consumers do not have these layers of intermediation when buying a fund and it is fair to say that those who buy funds directly tend to be the kind of consumer who can work things out for themselves.

So the argument that consumers will be confused by the disclosure proposed by Europe, the FCA and most fiduciaries who know what is going on, is specious. There is increasing knowledge on the buy side and for the IA, the game of filibustering over investor confusion is up.

If you cannot write transparently, how can you act with transparency.

I will not cut and paste any section of the paper to demonstrate its intent. Almost every sentence is full of long and difficult words, clauses and sub clauses that make understanding sentences a struggle.

If the aim is to demonstrate that the subject is too complex for ordinary people to understand, it succeeds, but only by the use of impenetrable jargon and syntax that should be a warning to the reader that this is not a paper attempting to make things clear.

That the IA argue that their proposals are aimed at the person on the street , but present them in such arcane terms, demonstrates the fundamental flaw in their approach, they simply are too conflicted to pronounce on the subject.

Past costs cannot be taken as a proxy for future costs?

At the nub of their argument, the IA propose that the overt costs of fund management- the Ongoing Charges Figure (OCF) be quoted separately from those member borne charges to their fund that are born covertly (and only appear today in obscure documents itemising costs charged to the “net asset value of the fund”. The impact of this is that the public will still be blinded by a partial number that claims to be an “overall” number and will have to add two numbers together to get to what they are actually paying.

This may seem a matter of semantics, but any salesman (or behavioural scientist for that matter) will intuitively understand that a simple number called “ongoing charges” will relegate a complex set of numbers – requiring a deal of explanation, back into the cupboard of concealment. The reason given for this separation of costs is that while the OCF number is fixed (it pays the fund manager) the other number- representing transactional costs is variable and cannot be relied upon to occur in future.

But if a manager has a track record of high transactional costs, it is fair to assume that he or she is incurring those costs for strategic reasons (and not just because he or she has no cost control). If costs are consistently high and performance is consistently high, why not invest in such a strategy, if costs are high and performance low, then the manager’s value for money is questionable. To suppose that there is no strategic intention in having high costs and that the manager might have low costs the following year, suggests that the manager has no strategy at all, There is no point in the IA continuing to argue for the separation of transactional costs and the OCF. If we are going to have an OCF or a TER or any number that claims to total charges, then it must be inclusive of everything.

A paper worth reading?

I am afraid that I have only half read this paper. I have not completely read it because it was so badly written, so annoyingly patronising towards the consumer and fiduciary, so deliberately dissembling in its central arguments but above all so utterly irrelevant to the central argument. The central argument is that we need good governance, we need to know what we are paying for and what value we are getting for the payment. We need to exercise that governance, usually on behalf of others, with full information and we need to get on with it. If the IA are not going to come to the party but are going to continue to write long and pointless papers like this one, they will become an irrelevance themselves.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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