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Yield shield

IFAs believe they are being left in the dark about changes in the standardisation of fund yield calculations.

It is now a month since the September 1 deadline for applying Autif&#39s recommendations. Not all fund managers have followed these guidelines and, when they have, many IFAs have not been told.

In the past, the lack of a single standard yield calculation has made it difficult for advisers and investors to compare funds on a like-for-like basis.

Many headline yields did not take annual management charges into account or include capital losses or gains.

As a result the advertised yields did not always reflect the true return that investors would get, leading to possible misunderstandings.

Autif felt it was time to dispel this confusion and introduce a standard method of yield calculation for the marketing of funds.

It recommended that marketing literature should display the gross redemption yield after charges, which takes into account any likely loss of capital.

The recommendation covers funds in the UK gilt, UK corporate bond, UK other bonds and global bond sectors.

Autif is only able to make recommendations but director of communications Anne McMeehan says the FSAwill be keeping a “critical eye” on marketing literature. Fund managers who do not take the recommendations on board will be asked for explain themselves.

Although it might not be their top priority, most fund managers are expected to come on line with the new method of calculation in the coming months.

Essex IFA Baronworth (Investment Services) director Colin Jackson says: “Fund managers that do not comply will find themselves under alot of pressure from IFAsand clients enquiring whether they are making the changes.”

The intention behind Autif&#39s recommendations is to make funds more transparent so that consumers will be able to look at yields without having to take other charges into account. But will this apparent simplification actually work?

Baillie Gifford sales and marketing director Ken Edwards thinks it should make life easier for people in the industry when trying to compare fund yields.

He says: “By putting them on a level playing field, it should be easier for intermediaries to understand and as a result it should be easier to explain to the consumers.”

But some IFAs think there will be little benefit. The feeling is that few consumers understand yield rates and establishing a standard method of calculation will add little clarity. They argue that most consumers will not even be aware of the changes.

Once again, it is up to the IFA to take on the mantle of educator.

The IFA will have to look at the small print and provide full explanations to the consumers to ensure they understand. The public will continue to be bombarded with marketing literature through the post and in advertisements and will still come to an IFA to make sense of it all.

One way that fund managers could ease this customer confusion is by simplifying their marketing literature. IFAs say dropping headline rates and including simple explanations about yield calculations will help consumers to understand the funds.

IFA Best Investment deputy managing director Jason Hollands says although consumers might find the introduction of standardisation difficult to understand initially, there is no point in having a simple system if it is incorrect.

He says: “Part of our duty to investors is to supply them with a correct yield figure. It is not just about making marketing literature simpler.

“They need to explain difference between the yields. The reality is that the misleading data was there in the first place and we have to explain to the consumers that providers have now been made to show the real procedure.”

The lack of information from fund managers is a big problem.

Baronworth is conducting weekly surveys to get up-to-date data but there are few firms that can afford the time and resources to do this.

McMeehan suggests that this lack of information might just be a teething problem, saying: “There is always confusion in a transitional period, no matter what the changes might be.”


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