The Pensions Institute has claimed that as much as 85% of transaction costs in some investment funds are being hidden from investors, and called on all asset managers to reveal their full expenses.
In a white paper published yesterday, the institute concluded investor returns were hurt by hidden costs in investment schemes such as mutual funds at least as big as visible costs in actively managed funds.
The paper suggested the concealed costs were mainly made up of assets and would be difficult to disclose. However, the remainder was taken up by visible costs such as commission, taxes and fees, which could be calculated, David Blake, the director of the Pensions Institute said.
'The hidden non-cash costs would be more challenging to calculate, since they involve the analysis of information that might not necessarily be automatically captured by the investment manager's own systems,' he said. 'Nevertheless the issue is whether fund managers systems could be configured to generate similar information on a cost-effective basis.'
No good reasons have been put forward for why all the costs of investment management should not be fully disclosed, he said. If total costs are not ultimately disclosed in full, it was questionable whether there could ever be effective and meaningful caps on investment charges.
'They are after all genuine costs borne by investors,' he went on. 'There is little point in requiring transparency where the reported measure for "costs" does not include all of the costs, or in the short-term, as many costs as could be reported on an efficient basis.'
Blake told The Actuary: 'Some of these costs are hard to measure, in the paper we talk about level 1, level 2 and level 3 costs.'
He said: 'Level 1 costs are costs that asset managers should know quite well, these are visible costs. Level 2 costs are not publicly reported, but it shouldn't be too hard for those costs to be revealed however, it would require the asset manage to buy new software.
'And Level 3 costs are known as market impact costs and they are going to be much more difficult to measure. We would need some agreement in the [global asset management] industry that it would be important to report those costs and it would have to agree how to do it.'
The paper has suggested the introduction of a staged approach towards full disclosure of all transaction costs.
In the initial stage, investment managers should be required to report all visible cash costs involving commissions, taxes, fees, custodial charges and acquisitions costs, together with the hidden cash costs of transactions.
'All these indirect costs relate to the efficiency of investment management proves and all good investment managers should have an estimate of their size,' Blake said.
