Vanguard criticises transparency shortcomings

Efforts to increase transparency must be accompanied by efforts to better educate investors, if the retail distribution review (RDR) is to have a meaningful impact, says Vanguard’s Nick Blake.

Nick Blake
Nick Blake

Rules on adviser charging will come into effect from December 2012 in an effort to make remuneration more transparent. Blake, head of retail at Vanguard, says the demand for better transparency is in danger of being confused with a demand for more transparency.

“There’s a danger we confuse investors more by giving them more information but without giving them more education,” he says.

“Transparency is terrific if it’s meaningful and actionable and if it’s useful to investors. One of the things that worries us on that debate is the cry for transparency is often just a symptom of a lack of trust.”

Blake cites the portfolio turnover rate as potentially problematic. While a high turnover rate is an indication of an active manager, the disclosure of the rate in itself is not enough.

He explains: “Portfolio turnover is a good indication of your manager’s style. What you don’t know is what is his portfolio turnover cost, because he can’t disclose his commissions.

“You also don’t know if the bets he has made are good ones or bad ones. Just giving investors more information on portfolio turnover rate in itself is like building half a bridge –  it doesn’t get you there.”

Investors need to be made aware of the underlying components behind the prominent figures, particularly if the requirement is not for their individual disclosure, he adds.

“With all this choice comes complexity and with complexity comes this need to educate. Everyone thinks its everyone else’s job to do. Everyone needs to do and keep doing it,” says Blake.

There are increasingly calls for the disclosure of a fund’s ‘cost of ownership’, which has potentially “fascinating” ramifications for the exchange traded fund (ETF) debate, says Blake.

A cost of ownership disclosure would also cover the cost of accessing and holding a fund, he says, adding: “If you can own an ETF for 10% of the cost of owning a fund, all of a sudden, that brings ETFs into the frame.”

Vanguard is currently in the process of constructing its first ETF offerings, while Blake argues it is possible to cover the ETF market with as few as 16 products.