(Brief)case study
I didn’t quite know what the smart gentleman meant when he offered me a drink in a first class carriage coming down from Manchester.
“It’s ok – we’re billing to the fund”. Then it dawned on me, the cost of his round of drinks formed part of an expense claim which (I later discovered) included full price first class tickets and overnight accommodation for a marketing visit to a conference”.
The logic was impeccable, the sales team would not stay overnight for anything less than five star treatment, the fund needed to be primed by “new-flows” generated by the sales team so the fund should pick up the cost.
Somewhere , deep in the back office of the fund administrators, the invoice for the round of drinks would eventually be settled from cash uninvested and earmarked for such tiny claims.
I declined the drink, my ticket was issued at a fraction of full cost, I was almost glad that my ticket was being subsidised by such extravagance, until I realised that I could be a unit-holder in the fund paying for that round of drinks.
A victimless crime?
The dilution of the impact of each individual claim absolves each participant of personal accountability. It is the collective impact of all such claims that makes a difference. The FT runs the story this morning “fund chiefs ‘seek meal expenses from pension savers’. The FT quotes Ralph Frank, an investment consultant, Chris Siers, an academic and Andy Agethangelou an evangelist. But they have evidence on their side. When I worked with Novarca, I was shown hard evidence of the lines in fund accounts dedicated to “entertainment”.
The Investment Association are not denying that personal expenses are being met, not from the annual management charge but on top of the management charge.
The Investment Association, which represents fund managers, said its members would not charge meal and entertainment costs to consumers and it would be “irresponsible” to suggest they were.
“There are no fees and expenses for defined benefit savers — they receive the benefit they are entitled to,”
There is a deliberate confusion of ownership here, worthy of Donald Trump. The cost of these expense claims is born by the funds into which defined benefit schemes invest, it’s impact is in lower fund performance which contributes to lower surpluses or higher deficits. The cost of meeting these expenses falls on the sponsor – typically the employer who can pass it on to the member in higher contributions or lower salary. The wealth transfer is exactly the same as in a DC scheme, it is simply less direct.
The work Dr Chris Sier is doing in creating a template which will reveal such costs where they are being incurred against the Local Government Pension Schemes is quite outstanding. It will mean that all the individual expense claims and their aggregate effect will be visible to those running the fund. The LGPS represents a substantial chunk of our council tax bills. For many of us, the amount we pay towards LGPS pension costs is more than we pay into our own pension. These fund expenses contribute to that cost. These casual expense claims are not a victimless crime.
Transparency is the only answer
Practices such as that in the (brief) case study are replicated countless times over the course of the year. They are permitted under the slenderest of excuses, that they are legal. That means that somewhere in a 20,000 word investment management agreement, a fund manager has granted himself the right to take “reasonable expenses” from the fund to meet certain costs of the fund. The division between the stated annual management charge and costs made directly to the “net asset value” of the fund can be critical to the commercial success of the fund.
The only way that we can understand this division of spoils is through Government intervention, which is why the TTF is right to call for full disclosure at the fund management level. Even if this means that the overt charge (the AMC) increases, full disclosure will ensure that the bellies of the fund managers and their marketing teams are not lined at the expense of long-term returns to unit-holders.
The complacency of the fund management industry, so evident in the quote from the IA, means that voluntary codes haven’t and won’t work. The asymmetry of information is loaded against the consumer, all the cards are with the fund managers who collect, manage and account for the money. To date they have hidden behind legal agreements, inscrutable accounting policies and the Investment Association. This cannot go on.
That is why I support the work of Andy Agethangelou, Chris Sier and Ralph Frank and why I am a member of the TTF. It is why I am proud we have a free press that can publicise its work. Two articles on this subject appear in the FT today, the links to them appear below.
https://www.ft.com/content/ee433a68-3f72-11e6-8716-a4a71e8140b0