Advisers, platforms and research providers have called on fund groups to make it easier to compare charges by making ongoing charge figures readily available.
Earlier this month the FCA called on firms to scrap annual management charges in favour of ongoing charges after finding many investment firms were failing to display fees “clearly and consistently”. The regulator has sought to shift the focus onto ongoing charge figures, rather than the total expense ratio, which includes charges such as the depository fee, registration fees and any performance fees.
The OCF is the same as the TER but does not include a performance fee. Neither the TER or the OCF include entry or exit charges paid directly by investors, interest on borrowing, brokerage charges or dealing costs.
Analysis by Money Marketing has uncovered the difficulties advisers are facing in trying to compare funds, particularly when it comes to getting hold of ongoing charge figures for funds through some research tools.
FE Analytics shows there are 3,335 funds in the Investment Management Association universe out of which 563 funds did not have OCFs readily available. A total of 560 funds had no total expense ratio and 166 had no annual management charge.
All funds will carry an ongoing charge figure on their key investor information document but many funds do not carry the OCF within their metadata – a kind of information feed or data stream which is “scraped” by research firms such as FE and Morningstar for their fund data. FE Analytics head of UK and European data Robert Botha says: “This is a serious issue. The RDR is all about better transparency for the end investor, but at the moment you have got a sizeable proportion of funds that do not provide us the figure which shows exactly what they cost to own. In any other industry this would be completely unacceptable, and this one should be no different.
“We are in contact with the IMA who have sent out circulars to their members to encourage these groups to improve their data distribution but the issue is ongoing. They need to be put under more pressure to ensure this issue is resolved as soon as possible.”
FE says where it spots the OCF is not being pulled through, it will call the group to request it is added to the metadata. Some groups tell FE to just get the OCF manually from the KIID rather than adding it to the metadata. But FE will not do that as it would have to manually check it every day.
Figures obtained from investment platform AJ Bell, which has used Morningstar data to examine around 4,000 funds, show a variance in the figures used to illustrate costs.
According to AJ Bell and Morningstar data, 192 of the 4,000 funds had no OCF, 134 funds had no AMC and 2,767 had no TER. A total of 73 funds did not have either an OCF or a TER.
Thomas and Thomas Financial Services managing director Darren Lloyd Thomas says: “It is very difficult to compare like-with-like at the moment and for an adviser, that really is how it should be done. The groups should be making the information readily available to make this process easier.”
Hargreaves Lansdown head of investment research Mark Dampier says the situation should have been resolved by now.
“The whole situation is a complete mess. There should be one figure to compare across all funds if a comparison is to be worth anything at all.
“It is also complicated by the fact that we have an increasing number of share classes which must only serve to makes funds even harder to compare. It is the FCA’s job to ensure this happens and I do not see why it has not already been done yet,” he says.
In its review earlier this month, the FCA assessed how 11 investment firms set out their marketing information for UK retail consumers.
The FCA says: “Firms were inconsistent in their use of charge information, displaying the AMC on factsheets and websites rather than the OCF or TER. Investors may be unsure about which figure to compare and how the AMC and OCF/TER differs.”
The IMA’s voluntary guidance to members in September 2012 urged the industry to adopt an ongoing charge instead of the AMC.
In March, Invesco Perpetual announced it was to remove the AMC on all its funds and replace it with an ongoing charge inclusive of registration fees and fund administration costs from 1 April.
Invesco head of distribution Ian Trevers says: “We think the FCA announcement has vindicated our move to switch all funds to OCF. We feel this is a more representative figure of the charges that clients will face.”
The lack of consistency across fund fees is also prohibiting research firms from aiding advisers in gaining accurate comparisons between different firms.
AJ Bell marketing director Billy Mackay says: “This inconsistency will undoubtedly present advisers and research providers with challenges. Many advisers will use research tools to support their due diligence and advice process.
“There are a variety of approaches adopted when collecting and analysing fund data across different research tools.
“Many advisers will take it at face value that the fund charge information being presented is accurate and consistent but I am convinced this is not always the case. Many appear to be moving to OCFs but it goes without saying they have to deal with the same challenge outlined above.”
Artemis head of retail Richard Pursglove says the fund group is currently working toward ensuring there is an OCF readily available.
He says: “We welcome the FCA’s thematic review regarding clarity of fund charges which paves the way for uniformity across the industry using a single figure for comparison, the ongoing fund charge.
“I expect the industry including fund groups, platforms and publications to adopt the OCF reasonably quickly.”
City Financial’s research arm Adviser Centre leader Peter Toogood says a TER could be a better cost indicator as it includes a performance fee where one is charged. “The TER would seem to be a more indicative measure of charges as this includes a performance fee. This would be especially helpful when looking at hedge funds in which the performance fee can make a very large difference.”
Investec managing director David Aird says the journey to clarity for investors does not stop at the publication of OCFs across all funds and says a total cost should be the end game. “The investor is sometimes forgotten in all of this. As things stand they have no chance of being able to compare funds on a like-for-like basis.
“The aim has to be to have a figure of the total cost of the fund which covers every associated charge. While the IMA should be applauded for its attempts at uniformity, there is still work to be done to make charges as clear as possible.”
|Cost||Included in TER?||Included in OCF|
|Annual management charge||Yes||Yes|
|Registration fees, regulatory fees and similar charges||Yes||Yes|
|Entry or exit charges or another paid directly by investor||No||No|
|Interest on borrowing||No||No|
Key points from the FCA’s review into fund charges:
- Initial charges or performance fees add to the complexity of charging structures
- Some firms referred to different charge figures in various documents and were also unable to fully explain their charging structures
- Using the annual management charge as the headline charge figure on marketing material does not provide investors with a clear, combined figure for charges as it excludes additional charges and expenses taken from funds
- Charging structures were made “more complex” by some firms who used administration charges that did not correspond to specific administration costs
- The FCA encourages all firms to use the ongoing charges figure as the headline charges figure “consistently in all marketing material” for Ucits funds to allow investors to better understand and compare charges
- The FCA also recommends that platforms, advisers and other intermediaries adopt the OCF as the headline charges figure for Ucits funds
Murphy Wealth partner Adrian Murphy says: This is definitely an issue. It is typical of the fund management industry really as the last bastion of smoke and mirrors. I think what we try to do is qualitative research and once we have identified the funds we want, we then go and ask them for charges. It does seem almost impossible to do like-for-like comparisons through the research tools available.
Capital Asset Management chief executive Alan Smith says: This is an area of concern for advisers in the supposedly transparent post-RDR world we now live in. As advisers, we are under a lot of pressure to disclose our costs in full and so should fund groups. At the moment, I do not think there is coherence across the board and it can be difficult from a due diligence perspective. If we can achieve an easily accessible OCF for all funds as the IMA proposes, then that is a step in the right direction.