New requirements on costs and charges disclosure are giving advisers a headache.
It is no wonder some advisers have re-named the aggregated information on costs and charges they must present to clients under Mifid II “aggravated” information.It is a headache on many levels, not least a lack of understanding, a lack of information, a lack of accessibility and confusion due to it being presented in different formats.
Platforms may well provide a document that contains all the information to be issued to clients but advisers must ensure the information they have inputted – such as fund amounts to be invested and adviser charges (initial and ongoing) – are correct. Errors will affect the accuracy of disclosure.
What to include
It is important you understand what information must be included and how to calculate it. This is because you may recommended products held off platform and, if the platform has not facilitated your adviser charge, their disclosure will not include this.
Your clients receive a great deal of information, so presenting your aggregated information in a simple way will help them understand what you have provided.
Where you provide investment services, you must present an aggregated overview of all the service costs and charges, as well as any recommended solutions.
Do not forget an illustration to show the cumulative effect of costs on the return. The costs, charges and effect must be provided in advance and at least annually where relevant.
The costs and charges that need to be aggregated are those relating to relevant services and investments. They must be itemised separately, totalled and expressed both in cash amounts and as a percentage.
- Initial advice fees;
- Ongoing advice fees and management fees: for example, for providing a discretionary fund management service;
- Third party DFM costs, platform fees, broker commissions for executing orders and transaction taxes such as stamp duty;
- Any research or custody costs;
- Performance fees.
- Front-loaded management fees;
- Other management fees, such
as those charged by a fund manager and service costs;
- Broker commissions, entry and exit charges paid by the fund, stamp duty, transactions tax and foreign exchange costs.
Illustrating the cumulative effect of costs on return should not be seen as a separate disclosure but instead a continuation of the aggregated costs and charges disclosure.
For an advance disclosure, as a new investment will only be arranged at this stage, you might need to make an assumption on the investment return over the coming 12 months.
The assumed growth rate could be the average of the investments being recommended or one that is decided at investment committee level (or similar). The rationale for the growth rate used must be documented to ensure a consistent approach.
The problem is that there is no standard way to present the cumulative effect. Is it a graph, a table or text? All we know is that the information must show the effect of overall costs and charges on the return of the investment and any anticipated spikes or fluctuations. If we use an illustration, this must also include a description to explain what it is showing.
For this illustration, you will first have to calculate your total aggregated costs and charges, as certain figures from this calculation are used. Remember, if the client has paid the adviser charge directly to you (so, not facilitated by a third party), you do not need to take this into account when illustrating the cumulative effect of charges on the return due to it not having any effect on the return.
The fact there is no standardised approach to disclosing aggregated information makes this task even more difficult.
I believe the best way to do so is to use tables. Not only do they assist those who have to put the information together but they are easy on the eyes for the reader. Provided, at least, they are presented appropriately.
Sharing this information with clients during their review enables you to make sure they understand the costs. Feedback from your clients is valuable. If they can understand the information you have presented, you have got it right. If not, you need to adjust it.
If you cannot obtain the information required from a platform or a provider, a best endeavours approach to provide it to your clients should be taken and this should be documented. What you cannot do is ignore it.
Ian Grundy is head of business risk at Threesixty