Veritas propter investigationem [Truth through research]
TitleOn the Disclosure of the Costs of Investment Management (2014)
AuthorsDavid Blake
InstitutionPensions Institute, Cass Business School
 Disclosure issues
CountryUnited Kingdom
Date Published2014
Date posted on PR24 Jan 2015
Blake, D, (2014). On the Disclosure of the Costs of Investment Management (2014) Pensions Institute, Cass Business School,

PensionReforms’ summary and comments

As the pensions world shifts to a Defined Contribution environment and members assume responsibility for the investment risk, the costs of doing the funds management business become an issue of public interest.  Under the traditional Defined Benefit scheme, this arguably was of no direct concern to members as their benefits usually did not depend on the after-tax and after-fees returns earned by the managers.  The sponsoring employer met those through having to pay the balance of the cost of providing the promised benefits.


In a Defined Contribution scheme, the members pay the costs of investment management through lower returns.  Explaining the impact of different kinds of fees is hard enough; finding out what they are is probably more difficult.


The UK’s Financial Conduct Authority suggested in May 2014 that the industry’s preferred ‘annual management charge’ (AMC) should be replaced by an ‘ongoing charges figure’ (OCF):

“In other words, the OFC measures costs that an investment manager would pay in the absence of any purchases or sales of assets and if asset markets remained static during the year.  The next day, on 14 May, the Financial Reporting Council accepted the Investment Management Association’s (IMA) proposal to report not only the OFC, but also all the dealing costs and stamp duty paid when an investment manager buys and sells assets in the fund’s portfolio.”


This report suggests that even the enhanced OFC is not enough.  For example, it misses “indirect transaction costs”.


“I would argue that no good reasons have been put forward for why all the costs of investment management, both visible and hidden, should not ultimately be fully disclosed.  They are after all genuine costs borne by the investor.  Furthermore, recent studies have shown that hidden costs are at least as high as visible costs, if not much higher.  Full transparency could be introduced in stages.”


The report recommends that statements of costs should identify everything  (in the form of a ‘rate of cost’) that could then be deducted from the gross rate of return to give a net rate of return.  It should also be given “…as a monetary amount – which can then be compared with the monetary value of the investor’s portfolio…”


The report identifies three levels of costs – first the “visible cash costs” such as commissions, taxes, fees, custodial charges and acquisition costs.


Next there are the “hidden cash costs” at Level 2 such as the bid-offer spread, transactions costs in underlying funds and “undisclosed revenue”.


Lastly (and eventually) there are “indirect non-cash costs” at Level 3, including “market impact, information leakage, market exposure, missed trade opportunity or market timing costs [and] delay costs.”


The report recommends that the government should investigate the Level 3 costs and propose ways to identify and monitor those.


“If total investment costs are not ultimately disclosed in full, then this leaves two open questions: (1) how can there ever be an effective and meaningful cap on charges? and (2) how can active investment managers ever assess their true valued added?”


PensionReforms agrees that managers need to give savers much more, much better information on the costs associated with investment management but thinks the report’s proposals are too complicated.


Even if all three levels of disclosure described in the report were available, how might the ordinary (even the informed) saver make any meaningful comparisons between two or more alternative managers?  Savers need direct, complete, comparable data and also need help in how to interpret it.  For example, comparing two products that are in all respects are exactly the same, except with respect to the proportions of share-based investments held in each, is pointless.  That’s because shares are almost always more expensive to manage than, say, cash or bonds.  And the expected risk/return profiles are different.


Has manager A added more value than manager B despite being twice as expensive?  That’s easy to ask and quite difficult to answer.  Even making the detailed information available to expert commentators will not help members much.


PensionReforms thinks it is more practical to focus on the net of tax, net of fees returns that members actually receive and to develop an administrative framework that requires managers to submit monthly data, to have that audited on a regular basis and then to publish that in a way that allows easy, relevant comparisons to be made.  Most retirement saving schemes have valuable tax and administrative concessions and submitting the required information should be the price of those concessions being allowed to continue.


While this type of disclosure might miss the immediate subtleties of some of the hidden indirect non-cash costs that the report identifies, the impact of those will feature in proper cross-manager comparisons of products offering similar asset mixes. (File size 470 KB; 13 pp) 714