Regulators should focus on platforms and other intermediaries, not just asset managers, when they take aim at fee transparency, experts argue.
Speaking at a Transparency Task Force debate last week, Newton head of defined contribution Catherine Doyle claimed regulators need to examine the complex layers of fees around investment platforms, and not just point the finger at asset managers.
She says: “The spotlight is always on asset managers rather than the costs that are held by platforms. How should that be dealt with?
“Also, in DC, a lot of the structures are target date funds or life strategy, so apart from the underlying building blocks, there are costs that will be attributed to the platforms again, so how do we deal with these different layers?”
Doyle’s comments follow this month’s publication of an FCA consultation paper on transaction costs disclosure suggesting new rules where asset managers could be required to disclose aggregate transaction costs to pension schemes that invest in their funds.
Among the proposed rules, asset managers must provide a breakdown of transaction costs, including specific costs such as taxes and securities lending costs, when asked.
Doyle says: “It feels [the platform world] is a complex heavily intermediated world. Obviously as asset managers we are dealing with our building blocks but there is more complexity than that.”
The Pension PlayPen founder Henry Tapper, speaking at the panel led by investment consultant and former Investment Association chief Daniel Godfrey, said an analysis of platform charges should be addressed separately from the FCA study but agrees it is a “massive extra problem”, especially in self-directed investments.
Tapper says: “The FCA paper doesn’t deal with platforms and the total cost of DC. If it did it would do the job of the DWP. We know that a typical Sipp platform will charge 2 or 3 per cent, so there is this massive extra problem out there which has to do with self investment in these platforms which needs to be addressed elsewhere.”
However, Godfrey says it is more urgent to look at funds first and the way they charge before moving into examining the distribution chain and the different layers of fees applied to it.
He says: “In asset management we always had issues in transaction costs. Maybe there is more leakage of value in foreign exchange transaction costs than anything. Funds are the building blocks, there are a lot of different ways to access them, as through a platform or an ISA, the core competence that you are trying to access is the competence to give you exposure to all stocks in the world at low cost and to get better returns so we need to get that right first.
“Also, we need then [to think about] the cost of platforms and advice. We also have the operating costs and the transaction costs and I think the issue on transacting the fund is a separate issue that is around the practice of investing.”
Godfrey says once funds’ transaction costs as well as custodian and explicit costs are revealed, to calculate the total net asset value of the fund, both platforms and IFAs could apply that cost on each unit they hold for their clients and have a transparent final fee.
He says: “For funds we had the ongoing charge figure, but the only thing significant with that in terms of describing something has been the absence of the research costs which are being paid through dealing commissions.
“In calculating the NAV for clients, you must know which costs have been agreed, whether that is transaction costs, the explicit transaction cost and the costs paid to custodians. What we’ve got to look through the total cost of ownership, with the published NAV, there should be a published true cost since the last NAV was published on an unit basis because then a platform provider or an IFA can apply that cost to the number of units they hold, which you as a fund manager most certainly don’t know, so you know what will be the cost of holding those units or to give advice.”