A senior analyst at Hargreaves Lansdown has said passing on running costs to investors has become standardised across the funds industry, comparing the practice to a business charging customers for its own phone bills.
“We see managers charging investors for research, administration and audit costs, amongst others. However, these are costs managers themselves incur for running their own businesses, and shouldn’t be passed on to the end client,” Laith Khalaf told Funds Europe.
As a result, the UK’s largest retail broker is pressing for asset management firms and the Financial Conduct Authority (FCA) to introduce a “a single, transparent charge, out of which managers pay for running their funds”, and for greater transparency on charges.
UK star manager Neil Woodford has already adopted this policy, and Hargreaves Lansdown hopes his prominence will have a “trendsetting” effect on the UK asset management industry. However, Khalaf acknowledges the lack of a level playing field in this regard could mean a voluntary en-masse adoption is unrealistic – and there may consequently be a need for the FCA to step in and make a flat fee mandatory.
Khalaf also suggests firms administrating funds themselves could be overcharging for this service, saying it’s not in their commercial interests to offer the best deal to clients.
Jason Hollands, managing director of UK wealth manager Tilney Bestinvest, says he is “sympathetic” to the case for greater simplicity and a single fee figure felt “instinctively right”.
However, he fears a potentially perverse outcome of rolling all costs into a single ad valorem fee might actually be higher fund costs over the long term, in particular on funds that go on to become popular.
“Under current industry practice, fixed costs like audit fees diminish in impact as a fund grows in size, whereas if these were rolled into a single percentage based fee, the cost benefits of fund scale would not flow through to the same extent,” he explains.
Fee transparency has come under increasing scrutiny in recent months. Last week, Valdis Dombrovskis, vice president of the European Commission, outlined plans for an official investigation of long-term retail investment and pension product fees, and the FCA proposed asset managers could be obliged to disclose aggregate transaction costs to pension schemes that invest in their funds.
©2016 funds europe
