The FCA’s proposals on all-in fee disclosures
What is the FCA proposing?
The FCA’s market study and consultation aims to “ensure that the market works well and the investment products consumers use offer value for money”. In particular, it calls for new guidance to ensure that all-in fees for investing in funds are disclosed (as required from January 2018 by MiFID II and PRIIPs) in a way that investors can easily understand, is not misleading and is comparable.
Why were the proposals issued?
The FCA is concerned that all-in fee disclosure information might be presented in a way that is not entirely clear to investors, preventing them from being able to truly compare fund charges.
This stems from a broader concern that investor awareness about, and focus on, charges is often poor or nonexistent.
An FCA analysis of the behaviour of visitors to fund supermarket websites reveals that fewer than 9% of visitors look at charges, under 3% look at documents related to charges, and just 0.1% sort funds by charges.
Who do they affect?
The proposals primarily affect asset managers, but, says Deloitte’s Andrew Bulley, the FCA will no doubt expect advisers and financial planners to “work with the grain of these proposals”.
What happens next?
An FCA consultation paper on its proposals is expected in 2018 and will be open to financial planners for responses.
In June 2017, the FCA published its Asset management market study – final report
(MS15/2.3) and Consultation on implementing asset management market study remedies and changes to Handbook
(CP17/18). Its aims were to “ensure that the market works well and the investment products consumers use offer value for money”. It found “weak price competition in a number of areas” of the asset management sector. There was a disconnection between the charges levied and the gross performance of actively managed funds. Also, it has concerns about how asset managers communicate with their clients and how useful their communications are to investors.
Although part of a much wider investigation, the clarity of the fees charged by asset managers has been a particular area of concern for many years. In plain language, an investor, whether retail or institutional, cannot easily see the real cost of investing in a fund, largely because of lack of transparency around issues such as the cost of the turnover of fund holdings and fund manager costs when a fund outperforms against relevant benchmarks.
In MS15/2.3 the FCA proposes an all-in fee (see boxout). The all-in fee concept is not new, but rather an affirmation of similar proposals set out in two key pieces of recently implemented European Union legislation: the Markets in Financial Instruments Directive II (MiFID II) and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation.
We approached a quintet of asset managers and financial planners for their opinions on the FCA’s proposals.
Daniel Godfrey, co-founder, The People’s Trust
Daniel welcomes the idea of an all-in fee but says that is not what the FCA is proposing. “To my mind, you should say to the consumer: ‘This is the fee and we will pay for all the ongoing running costs’. What the FCA is saying is: ‘Just carry on as you are and we will add it up into one number’.”
David Norman, joint founder and CEO, TCF Investment
David says the FCA’s proposals have been a long time coming and that it should drive change through the entire supply chain, from financial advisers – which it has done by means of the Retail Distribution Review – to platforms and fund managers.
“[Investing in a fund] is a really big decision. So why isn’t the customer given the same level of transparency as when he or she makes a much smaller purchase, like buying a fridge or a car?
“The customer needs to know in pounds sterling how much it will cost per £1,000 of investment. If a higher price were to be charged up front for a particular level of service, that would be fine. At least the client would know what the all-in charge is and they could vote with their feet if the result is disappointing.”
David says an all-in fee disclosure will enable planners, advisers and wealth managers to offer their clients a better service. “They are typically engaged with a much wider view of a client’s affairs than just the investment funds that they recommend. Consequently, clients can see the charges involved with the funds and their advisers can add on their own charges – for example, for annual reviews – to provide their clients with a clear and transparent cost.”
Mike Webb, CEO, Rathbone Unit Trust Management
Mike raises concerns about the idea of stating a budget in advance for transaction costs, arguing that it would create some very dangerous conflicts of interest. “Managers of a firm might try to persuade fund managers to reduce transactions,” he says.
Lee Glennan CFPTM Chartered MCSI, managing director, Glennan Wealth Management
Lee says keeping costs down is one of the key drivers of his firm’s investment philosophy, so he welcomes greater visibility on costs that the FCA’s proposals will give to their clients.
“We only use low-cost institutional investment funds and we set out to clients clearly the three elements of their overall costs: the total expense ratios of the funds; the platform costs; and our fees,” he says. “We summarise and quantify this in writing each time we advise.”
What are your thoughts on the FCA’s all-in fee proposals?
We’d love to read them in the comments
Andy Jervis CFPTM Chartered MCSI, director and senior planner at Chesterton House Financial, Accounting & Legal
Andy explains that the financial planner’s fee for the services his firm delivers is set and agreed in advance and fund managers’ fees are in addition to that. The size of those fund management fees depends on which funds are selected. “We provide the data, but we don’t sit down and discuss why we’ve chosen this or that fund for a client on the grounds of cost,” Andy says. “I do think, though, that knowing a single fee upfront would be a great help to those people who buy funds directly, and they are increasing in number.”
This article was originally published in the Q4 2017 print edition of The Review and entitled 'In search of clarity and compatibility'. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.
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