Mifid II, with its focus on ensuring investor protection, is making it harder for fund providers to hide what the total costs of a fund are in their product literature.
Broadly speaking, firms will need to be required to provide disclosures at point of sale, and periodically, each year, to all clients.
From 3 January onwards, asset managers will be forced to break down costs clearly and simply into four key categories for each fund.
In a nutshell, these are:
- The ongoing charge.
- One-off fees such as entry and exit charges.
- Incidental fees, such as performance charges.
- Transaction fees relating to the investment product.
Mifid II is clear about what cost information must be made plain to investors. As outlined by Susann Altkemper, counsel for City law firm CMS, this must specify: “All costs on an aggregated basis, relating to both the service or ancillary service provided, plus the costs incurred in relation to the investment recommended or marketed.
“Disclosures must also cover any third-party costs.”
Under Mifid II, to make sure these are transparent and the end investor can understand the breakdown and aggregation of costs, all costs must be expressed in two ways: as a percentage, and as a cash amount.
Moreover, all retail clients will be given an illustration showing the cumulative effect of costs on returns, and any anticipated spikes or fluctuations.
Onus on providers
Linda Gibson, director of regulatory change and compliance risk for BNY Mellon’s Pershing, comments: “The promotion of transparency is in the core of Mifid II and the directive introduces additional requirements relating to the information provided to investors.”
This means any previous disclosure requirements on cost and charges will be enhanced with the obligation for firms to provide the client with a comprehensive illustration of all expected point-of-sale (ex-ante) costs and charges, including their overall effect on investor returns.
Says Ms Altkemper: “While clients will benefit from an increase in transparency, firms will need to develop compliant costs and charges disclosures.”
She says this will involve advisers having to collate data internally, and even from external sources, such as other firms in the distribution chain.
Accordingly, this will mean greater collaboration and data sharing between provider, distributor, adviser, platform and anyone else involved in the chain.
The purpose of this is to ensure that the client gets a specific and tailored breakdown of all the costs and charges they have paid out.
Ms Gibson adds: “The requirement of post-sale (ex-post) periodic disclosure essentially means the obligation to provide a personalised and annualised breakdown of all costs to the client.”
On this point the FCA is likely to provide further guidance based on industry feedback to previous consultations.
Drive to passive?
Some commentators have suggested an increased focus on fees and greater clarity around breakdown of costs will drive more advised clients away from actively managed funds to passively managed funds in the hunt for cheaper options.
