We welcome all research and constructive contributions to the ongoing discussion around costs disclosure in financial services and for pension schemes in particular. The recent research published by the Investment Association contributes to the debate and has already stimulated greater discussion.
12 Aug 2016
However, we feel that the focus of this research is not aligned with the prevalent concerns of the pensions industry in particular. Management performance is not the topic in question, nor are the relative merits of active or passive investment decisions. The central focus of the industry debate is the drive to improve transparency of information, including access for investors to know how they are spending their money. The title of the press release, “Hidden Fund Fees: The Loch Ness Monster of Investments?” suggests that cost disclosure is of primary concern; however, the current IA research does not focus on this central issue.
At the heart of this transparency gap in the analysis is the exclusion of implicit costs. In order to understand the full costs to the investor, it is imperative to include undisclosed charges in addition to the well-known explicit charges. By ignoring the very costs they identify as opaque in their own definition of implicit costs, the fundamental issue of transparency is not addressed. We do not believe that these undisclosed fees will be of surprising magnitude; however, we believe they remain significant and must be included in any full cost analysis.
In our opinion all costs matter, irrespective of their size, therefore none should be discounted. As Hugues Gillibert says in the IA’s press release, “by taking into account all costs borne by the funds and in turn investors…” we can judge “its potential impact on fund returns”. Greater efforts need to be focused on capturing full cost mix. Therefore, we look forward to seeing the Investment Association’s disclosure code in due course which will incorporate full disclosure for all cost categories.
In our opinion all costs matter, irrespective of their size, therefore none should be discounted.