Rob Reid: Urgent changes needed over cost disclosure

As Mifid statements start to appear on people’s doorsteps, making them recoil at the total costs they are currently bearing, it is clear this could be the start of a second wave towards passive funds. Recent reports on discretionary fund management performance will not have helped this position.

If we look at the use of actives and passives globally, it is interesting to note some comparisons.

According to recent statistics from Morningstar, passive use is close to overtaking active funds in Europe, with inflows of $80bn and $93bn respectively.

In Asia, passives already hold the lead, attracting in excess of $100bn, although actives still take a strong $72bn. In the US, however, actives are seeing outflows of $80bn, with passives attracting $459bn. I spend a lot of my time now in Canada and the amounts going to passives there are still a fraction of what goes to actives: $7bn compared with $23bn.

One key reason for all this deviation is disclosure. With such a continual focus on costs, people are ignoring the fact they are only part of the equation.

When active funds are outperforming passive equivalents, why shouldn’t you pay a bit more? That said, we cannot ignore those DFMs that underperform.

We urgently need a more effective way of disclosing costs. Solutions should be simple and, with lateral thinking, there is no reason they cannot be extended into fund charging. It is through better performance reporting that I believe we will actually get to a solution. This can also address exit charges.

Talking about percentages or basis points is not helpful. It is not treating customers fairly, as the bulk of people have no idea what we are talking about.

Simplicity is everything and transparency is all. What you do for clients is what they will use as a benchmark.

I recently had a client move on and could not help having a quick look at where they had gone. Our charges were 1.25 per cent, which included all costs. When I looked at where they had been encouraged to go by an older relative, not only was the performance not there, but the charges were far higher, running at 3 per cent to 3.5 per cent per annum. An awkward conversation will no doubt follow.

And take when Standard Life recently announced it had cut the Elevate charges. To my mind, it was a bit like a sale in BHS, where prices had been put up a few weeks before, then reduced.

Perhaps that is treating customers fairly in their eyes, but I do not think it is in anybody else’s.

If we can find ways of servicing people at a lower cost, this will put pressure on both the fund managers and the platforms, because providers who ignore this do so at their own peril.

Rob Reid is principal of CanScot Solutions



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There are 10 comments at the moment, we would love to hear your opinion too.

  1. take the high road 7th May 2019 at 2:39 pm

    Sorry Robert, your articles are usually informative but for me I can’t help think that this was a bit of a ‘non-article’!I thought the heading was a bit of a give away but sadly, it just looks like you wanted to have a bit of a moan about loosing this client to someone who seems to be able to justify taking higher charges.

    To my mind, co-going percentage charges are fine so long as they are justified and we are doing something for them. If you think these will disappear any time soon, I doubt it; unless the FCA, HMRC DWP and anyone else in the world you can think of who also uses this method to collect their fees…not TCF, perhaps not but hey ho!!

    • I never said he was able to justify it, in fact the funds are still with us! My point was that they never disclosed their charges! Bit like web sites not stating them.

      Any charges are fine my issue is that “page 4” is still being “lost”

  2. Without wishing to sound condescending, if someone doesn`t understand percentages, should they really be taking their own investment decisions?

  3. Trevor Harrington 7th May 2019 at 3:31 pm

    You should now be declaring you total annual charges numerically rather than just as a percentage.

    • we do this was but way of comparison

      • Trevor Harrington 7th May 2019 at 5:39 pm

        If the client has seen your numerical total charges for the preceding year, and he/she has also seen the forecast of the expected charges for the coming year with the new Adviser, both of which are obligatory information … and still wants to go, then I would suggest that you are better off without the client.
        There is presumably some other factor which you are unaware of.
        It might simply be that he/she is a nutcase.

        I recently saw a person who I do not want as a client.
        He is a very wealthy retiring businessman with holdings in the UK and in China.
        His large ISAs are being managed by a company that takes initial fees on new investments, as well as 1% ongoing, and plonks it all in bog standard managed funds, which are underperforming my own management by -3% per annum.
        He also took out a flexible whole of life policy to cover IHT two years ago (aged 63), which he did not know was reviewable, and costs £650 per month. He was unaware of what the initial fee (commission) was for this product, because whilst he might have had the illustration (he could not remember), he did not read it.

        His wife has been a client of mine for ten years …

        I am happy that she is and he is not.

  4. Philip Castle 7th May 2019 at 4:04 pm

    If charges are too low due to a percentage deduction being used on small cases, then mroe affluent clients could be cross subsidising the more affluent client on the same percentage which may equally not be TCF.
    .5% of £250,000 is of course £1,250, but £1,250 as a percentage of £80,000 is 1.5625% and the work for both clients may well be the same, so should someone be charging 1.5% to the smaller case?
    As to passives versus actives we use a mixture of the two, but currently the weighting has gone massively towards actives.

  5. Patrick Schan 7th May 2019 at 4:22 pm

    If everybody that voted for brexit could fully understand what they were doing, when they voted leave, they must be able to work out mere percentages. Surely Rob is not suggesting some people are more incapable than they make after the event.

    And I make no apologies for mentioning brexit, just in case someone wants to have a go.

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