The Financial Conduct Authority (FCA), the UK regulator, is finally throwing a lifeline to investors over unfair costs being charged for different classes of shares in the same fund. Investment managers and intermediaries will no longer be able to recommend or move investors into the most expensive shares classes. They will be obligated to move investors into the cheapest shares classes as long as it is in their best interests. When would it not be? For clients ‘trapped’ in expensive share classes it will mean a way out and reduction in costs.
The only aspect of an investment that we can absolutely guarantee is the cost. Costs matter and over time will produce a significant drag on the return on capital.
Mutual Fund managers have for too long been issuing a bewildering number of different share classes for a given fund each with a different charging structure. The higher the cost to the investor the greater the commission for the intermediary or gain for the producer. This practice called ‘box profits’ has now been ended.
Previous rules that came in 2013 left investors who had invested prior to that date ‘trapped in legacy classes’ with high costs. The financial watchdog has said that advisors and fund managers will no longer have to seek individual consent before moving investors to clean or commission-free share classes. In other words investors will automatically be switched at 60 days notice. Allowing investors access to cheaper shares of the same fund is the regulator’s way of ensuring firms deliver a proper duty of fiduciary care. Which in the ‘old days’ we used to call trust.
A recent independent report published by the FCA showed that the way in which fees were disclosed is as important a consideration for investors as the information on the fund itself. This however presupposes that investors are aware of the share classes that are available for a given fund and the differences between them. Research also showed that investors chose lower cost funds when the information was presented clearly enough so that they could understand the difference. Creative marketing has for years left all but the most diligent investors struggling to fully understand the total costs of a given investment.
This regulation will go some way to put pressure on managers to deliver a cost benefit for investors but will do little to rebalance the ‘conflict of interests’ between the interests of the shareholders of an investment management company and the investors in the investment product produced by the company.
Investors need to be aware of exactly what share class they are buying and the repercussions. Those who are currently invested must ensure that they own the lowest cost share class. Costs matter!
Jeremy Blatch TEP
This article was also published in the online and print editions of the Sur in English