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Some tips on transparency

Fund firms need to aim for uniformity in their cost menus

There is an understandable reluctance on the part of some investors to pay additional costs for the active management of their portfolios.

Against the current backdrop of difficult economic conditions and disappointing yields, it is hardly surprising that greater scrutiny than ever is given to costs.

However, our experience suggests an increasing number of investors want their investments more actively managed, being able to move quickly has genuine appeal. Add to this, the implications of the RDR in 2012 and there is momentum in outsourcing investment management to discretionary fund managers but recent issues have raised questions about the transparency of charges and consequently the value provided.

Recent reports with regard to discretionary managers’ opaque costs are most disappointing.

One of the principles of discretionary fund management should be complete transparency of costs. Making a profit is critical, clients will not thank you for going bust but when they access your service, make sure it is what it appears and costs are clearly stated.

When I dine out, I have a natural mistrust if a restaurant adds a standard “suggested” service charge to a bill in a non-obvious manner and still leaves the option to add a further tip.

Similarly, I dislike dishes that clearly need a vegetable accompaniment but come alone unless you are prepared to pay more for a small plate of any given vegetable.

I think most of us want to know we are getting value and that involves knowing the total cost, in straightforward terms.

A properly costed discretionary fund management service should not need hidden commissions to bolster, or create, profits. Dealing charges should not be a major source of profit. Entry and exit charges should be kept to a minimum. Don’t make clients feel trapped because of exit costs, and don’t create hurdles for new clients with initial costs. For many, the experience of a discretionary fund manager is a new one, and so to make entry and exit from the service low-cost and easy is surely the right approach.

The IFA community is increasingly transparent with regard to their costs and earnings, so it would be a shame if some discretionary fund managers were less up front. Additional costs are not always clearly reported in client reports that can run to 20 pages or more.

Surely, a simple regulatory statement as to your position on commission rebates would increase the transparency?

Partial retention of fund-based commission is operated by a number of discretionary fund managers and this can be acceptable as long as it is clearly disclosed. Some argue that additional administration is involved, hence there needs to be a retention. That is not our position, but I can understand the justification, so long as institutional shares are purchased where available.

If retaining all or a major proportion of fund-based rebates is part of your business model, then surely it brings into question whether funds which bear no fund-based will be considered to any significant degree. This means that not only exchange traded funds and many trackers will be off the radar, but institutional-only funds too. I am certain that is not something a client or an IFA believes they have signed up for.

We need to aim for some uniformity in our cost menus if we are to maintain our credibility with IFAs and their clients.

Karen Vidler is chief executive of FundIntelligence

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