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Pensions Institute calls for full disclosure on investment fees

28 May 2014

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The "visible and hidden" costs of investment management should be fully disclosed, the Pensions Institute has said.

According to the report by the Pensions Institute at Cass Business School, up to 85% of fund costs are hidden from investors.

The think-tank called for full transparency to be introduced in stages.

David Blake, director of the Pensions Institute and author of the white paper, said: "No good reasons have been put forward for why all the costs of investment management, both visible and hidden, should not ultimately be fully disclosed. They are after all genuine costs borne by the investor.

"Furthermore, recent studies have shown that hidden costs are at least as high as visible costs, if not much higher."

Visible indirect costs, such as taxes, commissions and fees, and hidden indirect costs, such as undisclosed revenue, the bid-ask spread and transaction costs in underlying funds, should be straightforward to collect or estimate from the information collected by the investment manager's own system, the report said.

Indirect costs that are non-cash costs, for example information leakage, delay costs and market impact, would be more "challenging" to calculate, since they involve the analysis of information that might not be automatically captured by the investment manager's own system.

Nevertheless, the report stated that there are organisations that specialise in advising investment managers on the efficiency of their investment processes, which can obtain this information for a fee.

Some have argued that full disclosure is technically impractical and would be too expensive to implement, however Blake said that this would not be the case for hidden cash costs.

For hidden non-cash costs, the Pensions Institute suggested that fund manager systems could be configured to generate similar information on a cost-efficient basis, or as an interim measure, periodic audits by external consultants can be made.

Regarding the argument that there are no standard definitions and measurements of transaction costs, the paper said that this issue is now being tackled by the UK government.

Blake said: "I would argue that the principle of full transparency is paramount. Further, there is little point in requiring transparency where the reported measure for 'costs' does not include all of the costs, or in the short-term as many as could currently be reported on a cost-effective basis."

True & Fair Campaign co-founder Gina Miller said that it welcomed the research and said: "Until these fundamental issues are resolved how can the Government be talking about a cap on pensions based solely on the annual management charge (AMC)?"

She added: "This research proves that the latest attempt to disclose all costs by the Investment Management Association (IMA), whilst dulcet in tone, is a pure farce at the consumers' expense.

"Contrary to the hyperbole emanating from Daniel Godfrey, the proposed new accounting standard for fund costs will not be one number, neither will it be in pounds and pence, nor can it be seen before investment, it excludes 85% of transaction costs, all initial charges, all exit charges, all adviser charges, all wrapper charges and all platform charges."

First published 28.05.2014

monique_simpson@wilmington.co.uk