Kate Rogers: New era of transparency in costs begins next year

The new changes around investments should be celebrated by charities, argues our columnist

Kate Rogers
Kate Rogers

There's a new piece of regulation in the investment world. With the natty title of MiFID II (Markets in Financial Instruments Directive), the new requirements are set to take effect from the beginning of next year and are likely to mean that any charities with investment assets will be getting letters from their investment managers, if they haven't already had the pleasure.

This will herald the beginning of a new transparency in the reporting of costs to investors. Managers will be required to provide a full statement of the costs of investing, personalised for each client, along with the impact of these costs and charges on the financial returns. Where the investment manager has invested in another fund, those underlying costs will also need to be shown.

As costs become more transparent, trustees will no doubt seek to compare the fees of one manager with another, enhancing competition. In this environment it will be even more imperative for managers to demonstrate the value they add. This is a topic I have spent a bit of time thinking and talking about over recent months.

Cazenove's latest publication, Value For Money, summarises our main findings and proposes a framework for trustees to think about investment-management fees. Costs should not be considered in isolation: they are part of an interdependent triangle that also includes risk and return.

To make it even more difficult, fees are the only certainty in this equation, whereas risk and return are forecasts based on what has happened in the past. So how can trustees evaluate whether they are getting value from their investment managers?

It is important to establish what you hope to achieve with your investments and make sure you are appraising the outcomes relative to your own objectives. This makes the choice personal and relevant to your own charity's position and ambition, and means the choice of benchmark is crucial. But financial performance is just one part of the jigsaw: you are probably paying for more - perhaps custody of the assets, reporting and service - often bundled within one charge. Critically, the services offered by managers vary. Some managers aren't regulated to give advice, which means you might not be fulfilling the Charity Commission requirement to "take advice from someone experienced in investment matters unless they have good reason for not doing so". And the approach to transaction costs varies, so clarity on what you are paying for is a good starting point.

Value for money is much easier to appraise once you have this clarity on costs and can compare the results directly with your aims. Trustees often want to use other comparators to see whether they would have been better off investing elsewhere. Many look at market index returns, but this assumes zero costs. Investing passively in index funds has its merits, but is certainly not without cost. A fairer comparison might be a passive portfolio after fees have been charged.

Considering value for money will mean that trustees will be better equipped to understand what they are paying and what benefit they are receiving from their investment managers. As such, the fee transparency that the new regulation will bring should be celebrated.

Kate Rogers is head of policy at Cazenove Charities

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