Fees, performance, damn lies and statistics

Recent events have highlighted again the need for standardisation in how fund managers report on both their performance and fees.

This matter was briefly touched on in the report of the Capital Market Development Taskforce and although not a new issue, it has gained more resonance as a result of recent publicity around how Huljich Wealth Management was reporting performance on KiwiSaver funds.

The issue at the heart of this matter is whether investors and financial advisers in advising clients, can rely on the information which is represented to them.

The need for reliance is part of the broad theme of building confidence that the capital markets are a sound place to invest.

A set of standards and compliance requirements are integral in creating a framework upon which this confidence can grow.

Currently there is no such legislative framework under which fees or performance is reported, nor is there any agreement by all market participants as to how these matters should be reported.

The consequences in other jurisdictions would certainly have been far more serious and would have automatically involved the appropriate regulators.

As there is no agreed or imposed benchmark for behaviour there is no measure by which people can assess the seriousness or otherwise of any given fund manager's actions.

Advisers and consumers alike should be able to rely on information provided and be certain of its content. They should not be left wondering under which method fees or performance have been calculated. The only way to remove this doubt is to have one standard that applies equally to all.

Research firms should have led the charge on this matter in the absence of guidance from the regulators. Given that one of the major research houses is owned by NZX, it is disappointing that they have not chosen to take the high ground on this matter.

Any move towards an industry standard should ensure that fees are calculated on the gross asset value of the fund.

The fees should include all manager fees (including sub-managers), account fees and any other costs the fund may bear. Where performance fees are charged, they should also be disclosed, even if only on an historical basis (given that the quantum cannot be defined, although the mechanism might be, going forward).

Broker or wrap service providers should likewise have to disclose the total portfolio costs of managing a portfolio of funds and direct securities. It is the comparative cost/benefits of the various forms of wealth management services that consumers should be able to determine after all.

Performance should be reported with the emphasis on net returns to investors, as this is clearly the most meaningful measure. The quantum of the fee is a highly misleading measure alone as the cheapest funds will undoubtedly be the funds that have the least active management (e.g. index funds). So on one level (low fees) the fund may rate well, but at another level (say net return) it may rate poorly. Inadequate emphasis on the inputs could leave consumers drawing the wrong conclusions.

Active managers who utilise various hedging strategies and risk mitigation techniques such as currency management should cost more than those merely reweighting to an index as such passive management entails little or no professional skill. Solely concentrating on the quantum of the fee will not tell the consumer what they are paying their fund manager(s) to do on their behalf.

It is also important to remember that tax is an impost that can often outweigh both costs and returns and needs equally intense consideration.

Consumer continues to lead the mantra that "cheapest is best". Seldom in life do people adhere slavishly to this proposition. I don't hear people raving about cheap health services, or advising friends on where to buy the cheapest meal, or lauding the attributes of driving a $500 car. Value is a much more important and often subjective attribute we aspire to when we acquire goods or services. Rather than tout for the cheapest service providers, any system of standardisation of disclosure of fees and performance should provide the consumer with the tools by which they can make their own judgement rather than lead them to a closed end conclusion through predisposed bias to any fund attributes or characteristics.

Once the framework is set in place in the manner set out above, consumers should be aware, they will then have all the necessary information (when coupled with the application of the Financial Advisers Act) to make well informed and educated decisions, with all the responsibility that entails.

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