Date: 19.04.16 Category: Ethics & Professionalism
As CFA UK noted in our December 2015 paper on the cost of investing, alongside the base fee (likely some level of AV or fixed percentage fee on the invested assets) there are other charges that need to be taken into account such as transaction costs, bid-offer spreads, commissions, taxes, dilution levies and market impact costs.
In the UK, determining the total cost is not without challenge and while future transaction costs are unlikely to be known, indications of these and other charges need to be communicated effectively. Stakeholders feel that there continues to be too little transparency about the all-in costs of investing and there remain calls for a single published charge.
These calls are typically directed at the retail market. In the institutional market, clients are better equipped to seek out and analyse the necessary information (and understand some of the potential flaws in a single charge), but even here clients report that it can be challenging to obtain the necessary information from their investment managers. Even when they do so, stakeholders report that it remains hard to assess the value for money that an investment manager delivers because there is no standardised approach for the reporting of all information about costs. As a consequence, there can be no utility provider that allows clients to compare costs across their entire portfolio. In the same way that the Global Investment Performance Standards (GIPS) enabled standardised approaches to performance reporting, stakeholders believe it would be helpful for there to be a commonly accepted approach to cost reporting.
It is also difficult for clients to assess the performance for which they are paying, or at least the manager’s contribution towards that performance. Performance is dynamic; it changes over time as a manager’s style generates greater or lesser returns and will also vary according to the effectiveness of the manager’s process and their skill in implementing that process. Past performance may provide some information about the longer-term likelihood of future performance, but there are many other variables that will influence future performance and which the client may be ill-equipped to assess without advice and guidance.
Ultimately, the client’s outcome will also be partially determined by the duration over which they choose to hold an investment. Clients who invested in the same fund at the same time may have very different views on the value of their investment depending on when they chose to close that investment.
Read more in our report.