The Investment Management Association (IMA) has called on fund groups to enhance transparency on charges across all investor-facing documents, as well as giving a more prominent position to the ‘ongoing charge' and provide details of transaction costs.
Instead of just outlining charges in the Key Investor Information Document (KIID), groups should provide further explanation of charges on their websites and factsheets in order to ensure transparency on fund charges within the industry, the IMA said.
The trade body has been in discussions with a working group, representing 50% of retail investors' assets under management, and this morning published a consultation paper on the fund charge disclosure guidance.
The ongoing charge, which will replace the Total Expense Ratio (TER) in KIIDs from July, should always be displayed instead of the annual management charge (AMC) or given equal prominence, said the guidance.
Mark Sherwin, senior adviser at the IMA, explained: "We have always said funds should disclose the TER, but the word 'total' implies that it covers all of the costs in the fund when it does not include things like transaction costs. The term ‘ongoing' charge highlights the costs are repetitive year after year.
"Also, the AMC does not give the full picture. It does not include things like audit, depositary or legal fees."
Alongside the ongoing charge, groups should give clearer explanations of all charges including entry, exit, ongoing, performance and transaction costs through separate disclosure notes.
Mona Patel, head of communications, added: "We do not advocate the single fee as it would be misleading to add charges and costs together - they are different types of costs. For example, transaction costs are not paid by all investors equally so they should be published separately.
"When a new investor enters a fund, the fund manager has to buy new assets to create new units for the incoming investors- this incurs transaction costs. In order to not disadvantage existing investors it will only charge the new investors. The same applies to exiting investors."
The guidance paper also said disclosure of transaction costs should be enhanced by providing three year average figures for broker commissions and transfer taxes, such as stamp duty, as a percentage of the fund's net asset value (NAV).
There should also be footnotes on pricing policies - whether the fund is dual or single priced.
Richard Saunders, chief executive of the IMA, who has also blogged on the guidance paper today, said: "While we believe that fund charges are already fully transparent, our proposals aim to provide end investors with improved and consistent explanations of costs and charges. They also tackle the difficulty of disclosing transaction costs which impact investors in much more complex ways than charges.
"There is no evidence that they act as a drain on investor returns but investors have every right to know the levels of transaction costs being incurred by their funds. The challenge for the industry is to provide helpful and meaningful information."
The move comes just a day after Investment Week reported larger groups may be fixing TERs on funds, so they do not lose revenues when assets under management fall, according to a Lipper report.
Members have until 3 August to respond to the consultation paper.
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