Last week at a meeting of the Transparency Task Force, I listened to Dr Chris Sier talk of his work in Turkey, understanding how that country’s regulators are getting to grips with fund costs and charges and ensuring that fund managers manage them.
In a brief synopsis Dr Sier explained
- That the Turkish financial regulators had no preconceptions of what a fund should cost to run.
- That they took as a benchmark to cap charges what their investigations told them people were actually paying
- That the cap they set was north of 2% pa being a realistic starting point
- That fund managers were told that consumers could not pay more than this cap in total charges.
On the face of it, this looks a very poor way of going about things. Arguments in the UK on workplace pensions rage about whether we should cap at 0.5% pa (L&G), 0.75% (DWP) and something rather higher (ABI).
If you don’t think this matters, you can have a play with David Pitt Watson’s fund costs calculator (here).
Turkey however is living in a world rather more like that recognised by experts like Pitt-Watson, Alan Miller – or indeed the noted American academic Thomas Phillipon, all of whom concur that what we pay for fund management is generally rather higher than what we are told we pay. Generally in excess of 2%pa.
What I like about the Turkish approach, is that it recognises that the starting position is bad and works to manage it. Fund managers get into severe trouble if they breach their total cap (I don’t know what severe trouble means these days but I remember Midnight Express).
In his discussions with the Turkish regulators, Chris asked what made them think fund managers were being paid too much. The Regulators pointed at the offices of the fund managers and compared them to the offices of all the other Turkish businesses.
This common sense approach to the problem is uncomplicated and therefore effective.Consumers are told straight what the cost of investing in a fund is, and are not given some half-baked calculation like our AMC or TER.
The weakness is that passive managers who really have got their costs down, can make massive margins under such an approach, as they don’t have to pay for “value-added” services such as stock-picking or tactical asset allocation overlays and can concentrate on ultra low trading charges generated from economies of scale.
If I was a low-cost fund manager in Turkey , I would full my boots while I can, because those Turkish Regulators will soon be sniffing round your accounts, wondering how I was making such wondrous profits and talking turkey about serious profit-sharing with the consumer.
So philosophically I’m with Turkey on this one. But, as we discussed after Chris has spoken, it is hard to convince people in Britain that the starting point from which we can manage funds down, is about 300% higher than the point most people consider where the cap should be set.
In truth, this is one of the fundamental lessons I am learning from the Transparency Task Force. It is a lesson that we should not run before we can walk and we should start walking from where we are, not where we’d like to think we are.
As the True and Fair campaign has show, as Norma Cohen has shown and as just about every bit of research continues to show, fund costs and charges are a financial iceberg, of which you only see the tip. The bulk of the cost of financial services is not disclosed because it is bundled into the price of units and can only be discovered by detailed analysis of the long accounts published on each fund by fund auditors and accountants.
This is what Alan Miller did, to reveal the true and fair costs in his pioneering work and it’s what the Investment Association should be doing right now.
As reported last week, the Investment Association continue to be in negotiation with the FCA about ways to assess what we are really paying and showing it to the public. What Turkey teaches us, is that without their expert help, it becomes quite obvious not only what we are paying, but that that number is way too much!