Here at the Investment Management Association, we oppose the continuation of requiring authorised funds to publish reduction in yield information as we believe it brings no apparent benefit to consumers and is potentially misleading when applied to funds.
From our point of view, the most effective action would be to abolish the requirement completely – and to do so now. At the moment it is under a sunset clause due to expire in June 2009 but more about that later.
So why do we want to get rid of the requirement? Put simply, the RIY is a measure of the impact of charges on a fund that takes account of both initial and ongoing charges and which is measured over a fixed period, usually 10 years. But it is not a clear measure of the cost of investing.
As it is calculated over fixed periods of time, it will generally not be the same periods over which the consumer wishes to invest. This is unfair, unclear and misleading. In addition, in order to calculate the RIY, you have to make a number of assumptions about the growth of the fund and how long the investment will be held. This is highly questionable as it could lead to a false expectation on the part of the consumer as to the actual performance of the fund.
Everyone knows past performance is not an indication of performance in the future and that investments can go down as well as up, so it hardly seems fair to guesstimate the future growth of a fund.
Another issue with RIY is that is does not reflect the way in which funds are actually sold.
In reality it is common for initial fees to be discoun- ted and for trail commission to be rebated.
By not allowing these factors to be taken into account in the calculation of the RIY it again makes for inaccurate and misleading sums.
And if that is not enough, here’s another reason why the FSA should put the final nail in the RIY coffin – European funds marketed into the UK, which are now becoming increasingly important in the UK marketplace, are not required to show RIY.
Why should UK funds be under this additional burden – one which might incorrectly lead an investor to choose another fund not showing the RIY but a more favourable measure instead?
Should the FSA choose to listen to reason and abolish the RIY, we would urge it to do so immediately and not await its expiry under its current sunset clause.
This is because the majority of fund management firms will have to undertake an annual review of their Simplified Prospectuses in early 2009.
And here’s the final twist. If the FSA decides to wait for the RIY to expire ‘naturally’, fund managers will be forced to carry out unnecessary work – at considerable expense – to comply with the requirement until then.
Far better to abolish it comp- letely now allowing companies to avoid inessential work and protecting consumers from further exposure to potentially conf-using and mislead- ing information about cost.
Mona Patel is head of communications for the Investment Management Association