An industry taskforce has identified more than 300 different costs associated with investments and pensions, and up to £120bn in hidden fees taken by asset managers a year.
Transparency Task Force (TTF) has created a template listing the costs, which will be presented to the FCA and other organisations. The template found more than 300 lines of costs and charges on investments and pension schemes, including administration, investment and risk management fees, client communication, legal, governance, regulation, compliance and intermediary fees.
The taskforce has identified six main stages of charges in the template: set-up, contribution, ongoing – steady state, ongoing – changes, withdrawal and wind-up. All the stages except set-up and the ongoing – steady state have transaction costs within them.
The research has been carried out for six months by a 39-member ‘costs and charges team’ at the TTF.
Estimates from FiNexus co-managing director Chris Sier, who is part of the TTF costs and charges team, show asset managers in the UK earn between £40bn and £120bn in extra costs retail and pensions investors “pay without knowing,” he says.
“The problem is so bad that some pension schemes are hiring forensic accountants now to get a grip on the value being lost to hidden charges. When the forensics eventually find out where the money is going they can put things right and in effect create a performance uplift for the scheme,” says Sier. “The problem is that at the moment all this is very difficult to do, because of all the opacity, obfuscation and a lack of standards and templates.”
“All this can be easily fixed with the right regulation, so whether you look at the problem as a market failure issue or a social justice issue you come to the same conclusion: the public interest isn’t being protected, and that needs to change, fast.”
Ralph Frank, pension investment specialist Cardano’s chief executive of defined contribution in the UK, who also leads the costs and charges team at TTF, says the whole industry can use the template.
“Not only regulators will benefit from this template, but this cost disclosure template also helps fund managers, savers and tax authorities. You can have the maximum granularity of costs and charges using consistent data,” he says.
Frank says the research has been made using like-for-like comparisons of different investment products so that it is not biased to a specific one. The template could also be applied to see all the costs and charges on alternative investments.
He adds: “The way to make this research useful is to map it to the products you are buying but there is no single level of disclosure in the market so far. Only if you have detailed costs you know what you’ve been deducted.”
Financial Services Consumer Panel chair Sue Lewis is wary of how Brexit might influence the progress of the TTF as well as other groups, including the FCA, in tackling fund transparency.
She says: “Every minute we don’t do something some person’s pension fund gets eroded. Asset managers make money by being obscure. We need regulatory intervention and what Brexit means is that the FCA has no excuses not to make this now.”
The TTF is not the only group working on building a fund costs template and guidance for regulators and providers.
In June, the Association of Member Nominated Trustees, which is also campaigning with the TTF on transparency of costs, voted to develop a template for costs and charges.
TTF founding chair Andy Agathangelou says the TTF template is “an evolution” of the AMNT idea, including more costs and charges.
The Investment Association has also moved in this direction, setting up an independent panel, named the Disclosure Code Advisory Boars, including representatives from the TTF, the Financial Services Consumer Panel and Local Government Association.
The project will come up with a Comprehensive Disclosure Code for asset managers to disclose investment costs.
The Local Government Pension Scheme is also going to publish a costs and charges template and start collecting data in September.