Does a bundled reduction in yield figure, delivered alongside unbundled charges, give a clearer overall idea of what to expect from an investment?
Unbundled charges are undoubtedly a progressive step for investors as they allow clients to analyse every stage in the investment process and determine exactly what they are being charged by each participant.
But would these clients also benefit from being simultaneously presented with a consolidated figure encompassing all charges in the investment process in the form of an overall reduction in yield?
St James's Place marketing and investor relations director Tony Dunk believes they would. He said the inclusion of an overall reduction in yield figure, alongside the unbundled charges, can offer a clearer idea of what the impact on the investment will be.
Do investors actually deserve more charging information?
He explained: "The Retail Distribution Review has moved things positively in some directions but there are collateral, unintended consequences of breaking up costs and charges, which make it more difficult for clients to understand what the true cost of receiving advice is.
"Bring all those costs together to express it as a yield reduction over a fixed term, typically ten years, alongside the unbundled charges. That gives a client a fairer comparison. Sadly, this has drifted into the ether at the moment.
"When we take an investment, we know how much we will pay the adviser and then we have to factor in all additional costs to give a true impact on a client's initial investment. We then add that to the ongoing and initial advice charges and deliver the reduction in yield."
From a product perspective, the regulator requires all packaged products, including a life policy, a unit in a regulated collective investment scheme, an interest in an investment trust savings scheme, a stakeholder pension scheme and a personal pension scheme, to list reduction in yield as part of the charging structure. However, undertakings for the collective investment of transferable securities (UCITS) are not required to disclose a reduction in yield figure as part of the key investor information document (KIID).
F&C Investments fund manager Gary Potter argued the information would quickly lose usefulness as it goes out of date.
He said: "The industry has to have common standards. Some may not include things [that] others do. If it is going to be shown, there has to be common guidelines.
"At a point in time, it is pretty meaningless and a confusing figure which people do not understand. As a figure it is important but the day after it is out of date. There are a lot of moving parts."
Potter added: "What your return might be in the future based on certain things is in the lap of the gods. For me, it is about the starting point when you enter an investment that determines how successful you will be with your investment."
Facts & Figures Financial Planners managing director Simon Webster warned there is the potential to overburden clients with surplus information.
He said: "Because the regulator has decided a financial product is so complicated, you get information overload. Nobody understands it and the whole purpose of all this open disclosure is wasted. It would also generate extra costs, which lead to higher charges. In my view, yield reduction is a good idea but only if it becomes homogenous."
A projected loss on the investment calculated across every step of the sales process, including platform charges and advice, is a useful but expensive feature to implement. The industry will probably feel it has enough to deal with in the current environment.
Where is reduction in yield required?
Non-UCITS retail scheme funds that opt to provide a key features document must show the total expense ratio together with what is known as a reduction in yield figure.
UCITS funds are required to give new investors a KIID, which does not disclose a reduction in yield figure.
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