UK trade body the Investment Management Association (IMA) has rejected claims that opaque costs and transaction fees associated with fund investment are too high and eating into investor returns.
The buy-side lobby group, whose members manage £3.9 trillion in investments, was responding to a policy review document released by the UK’s opposition Labour party that criticised an alleged lack of transparency over costs and charges associated with fund investment and a recent amendment to MiFID II made by Conservative MEP Kay Swinburne.
The Labour document sets out the party’s political agenda ahead of the October launch of an auto-enrolment system in the country – a UK law that compels employers to enrol workers in workplace pension schemes.
“There is a lack of transparency in the system,” read the Labour document, pointing out fund managers typically only disclose an annual management charge that can comprise less that a third of total investment costs. “Some pension providers do not provide savers with full and clear information in a simple way.”
Responding to what it termed “irresponsible scaremongering” by the Labour party, IMA CEO Richard Saunders said there was no evidence undisclosed costs were causing investors to lose out.
Transaction cost guidance
Saunders added the IMA had recently updated its guidance on how the UK buy-side should report transaction costs to their clients, which included additional disclosures on portfolio transaction costs, expressed as a three-year average for broker commissions and transfer taxes such as UK stamp duty.
In Europe, commissions are based on the value of each trade and are variable, compared to the US, where broker charges are typically expressed as cents per share.
The rate a European buy-side firm pays a broker depends on factors such as liquidity and the extent to which a trade will enhance a portfolio, which can make bundling them together with transaction costs misleading, according to the IMA.
Steven Wood, founder of Global Buy-Side Trading Consultants and former global head of trading at Schroder Investment Management, said in the UK the rules introduced by the Financial Services Authority in 2006 follow a report on institutional investment by Labour's Lord Paul Myners in 2001 and offer adequate transparency on commission costs.
“The breakdown of costs under the 2006 FSA rules was a dramatic step forward in clarifying how commissions are used,” he said. “This process is now very transparent. The fee structure associated with different funds has to be transparent as it is usually part of the buy-side’s sales pitch to attract investors.”
The 2006 rules required institutional investors to separate research and execution costs charged to them by brokers and report them back to clients.
Separately, Swinburne, a member of the European Parliament’s Economic and Monetary Affairs Committee, tabled an amendment to MiFID II in May which stated the marketing and advertising of funds should include a ‘total provider cost’ (TPC) and a ‘total investment cost’.
Under Swinburne’s amendment, TPC should combine the annual management charge of a fund, custody and administrative costs, performance fees and dealing costs based on the last 12 months and be expressed as the portfolio turnover rate multiplied by the full cost of buying and selling underlying assets.
A spokesperson in Swinburne's office said the amendment was designed to allow investors to better compare the different costs associated with funds across European member states.
While Wood recognised this would probably be an ideal situation for regulators, he cast doubt over the ability to achieve it in practice.
“Many large institutional clients negotiate their own fees with asset managers, which can be based on different models, such as profit sharing,” he said. “Fees differ per product and per client, so the disclosure of this breaches client confidentiality.”