I think there was some initial confusion around the ongoing charge figure (OCF) including or excluding transaction costs.
I hope this confusion has now gone away. All should be clear that the OCF does not include transaction costs and that both need to be provided to clients.
With that clarified, the additional confusion of negative transaction costs has needed some work, when it comes to communicating with clients.
How can a fund have negative transaction costs of say, 1 per cent?
I won’t patronise readers by going through the detail but it’s all to do with ‘slippage’ costs (another new bit of jargon) and the process a fund managers goes through in pricing trades.
The movement of the price during the trade can result in positive or negative slippage costs.
As a part of this process, we also get introduced to different pricing methods (more jargon coming up) including ‘arrival’, ‘opening’ and ‘closing’ pricing methods.
Client disclosure
So, where are we today in terms of what needs to be disclosed to clients?
I’ll end this piece with a brief summary of what advisers need to be telling clients and should have been doing since the beginning of 2018, although virtually no one was.
Pre-sale reporting:
- Product (fund), service (DFM, Platform, Isa) and adviser costs need to be aggregated in annualised percentage terms as well as pounds and pence, based upon the proposed investment
- Cost and charging information needs to be given to the client in ‘good time’ before they provide the relevant service to the client
- One-off costs (entry and/or exit, for example)
- Ongoing costs (OCF)
- Transaction costs
- Incidental costs, including performance fees
- Total fees related to funds should be quoted as ‘estimated’ (ex-ante) and include:
- If more than one fund is being recommended then the above fees should be provided at both an individual fund level and aggregated to illustrate the total recommendation.
Post-sale reporting:
Ongoing reporting is a bit more detailed, as one might expect, and should cover the following:
- The total fees should be reported once per annum
- The fees are those detailed as part of the pre-sale reporting, based on a client’s portfolio, on an ‘actual’ (ex-post) basis
- These should be provided in percentage terms as well as pounds and pence
- Reports can be sent to all clients at the same time ‘bulk’ or on an individual basis
- There's a requirement to report a 10 per cent drop in performance and multiples of 10 per cent in the quarterly reporting period by end of the business day - only for discretionary portfolios
Looking ahead, it is by no means clear as to our ongoing adherence to EU regulation once we actually depart the Union.
But UK financial services regulators have clearly stated that there will be no immediate disruption and no thought of tearing up the current directives and replacing them with something else, anytime soon.
For an industry that often feels under constant regulatory bombardment, this is probably good news – a little bit of breathing space for us all to get comfortable with Mifid II and all that it demands.
Mifid III anyone?
Paul Tinkler is insight development manager at Defaqto
