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IMA's Godfrey: the nuts & bolts of our all-in cost calculation proposal

IMA's Godfrey: the nuts & bolts of our all-in cost calculation proposal

The IMA has now issued a public consultation on our Statement of Recommended Practice (Sorp) for the annual report and accounts of UK authorised funds.

Whilst a Sorp doesn’t sound particularly sexy, this one represents a significant milestone on the road to the provision of a simple, all-inclusive, pounds and pence number that will give investors a good sense of what the cost of holding units in a fund has been and which they can compare to their investment return to begin to get a sense of value.

The Sorp proposes that all annual reports and accounts should contain tables that set out, for a unit held throughout the course of the year, details of the performance per unit; the charges per unit for managing and operating the fund; and the amount per unit for all transaction costs incurred when the manager buys and sells holdings on the fund’s behalf.

In combination, they produce a single pounds and pence figure that provides a clear view of the charges and costs of holding a unit and the value added to that unit throughout the accounting year.

Customers will be able to dig deeper if they wish. The charges will be broken down to show the annual management charge and all other charges for administration and operating the fund. Together these charges make up the ongoing charges figure. The transaction costs will be broken down into tax and dealing costs, with the dealing costs further sub-divided into execution and research costs.

Investment funds now have a long supply chain and this has meant that there is a complex set of costs borne by funds. Because it’s complex, it looks opaque and this has been a real issue for the industry in an environment where trust in financial services in general is low. We need to ensure that no reasonable observer can accuse the industry of 'hiding' charges and that our clients are well informed both about total cost and performance.

We’ve had terrific support for this initiative from our members and external stakeholders and I hope that, if the details are agreed for the Sorp by the end of the year, we will start to see the data being introduced in the course of 2014.

Whilst this is the key first step, we can’t stop here.

Post-RDR building blocks

Our proposed new metrics will help investors understand in pounds and pence terms the total cost of investment in a fund. But in a post-RDR world, this is likely to be only one part of the total cost of ownership that may also include product wrapper, distribution and advice. Our hope is that by providing the building blocks for the investment piece, we can encourage distributors and advisers to overlay their own charges in a way that helps the end investor really understand the total cost of their investment.

We also need to develop methodologies for providing a better and clearer way of explaining to clients what they can expect from a fund so they have a real basis for knowing when they should be pleased and when they should be disappointed.

And we also need to build on the indication of spread within the markets accessed by the fund that is already part of the Sorp proposals. Spread does not form part of the fund profit and loss account, which is at the heart of the per-unit calculation and, as these implicit costs create a drag on performance, it is important that we continue to consider the best way of explaining their effect to investors.

But one step at a time is the best way of avoiding a 'faceplant' or falling flat on your face as it used to be called….

The IMA and the industry as a whole, is very conscious of the very important job asset managers do for customers and the economy through effective allocation of capital to the companies that will deliver growth, jobs and tax revenues. We are also aware of how important trust, confidence and clear communications are if we are to be given permission by society to fulfil our potential to help people build resilience to financial adversity, reach their financial goals and prepare to ensure a decent standard of living as they get older.

We can only build that trust and confidence through actions that demonstrate that we mean what we say. And what we say is that our long-term success as an industry relies utterly on our ability to do a great job for our clients. In a world of constant change, that means keeping a relentless focus on constant improvement in the excellence of our standards, our operating practices and in the clarity of our communications.

The initiative to provide a simple cost number that consumers can trust is a clear example of the industry going well beyond regulatory requirements to deliver consumers something they need in a format that they can actually understand. And it’s examples of actions like these that will build the trust that we all need in the interest of our clients, the economy and the industry itself.

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