'They charged investors for their Bloomberg subscription': Watchdog tells fund firms to come clean over hidden 'dealing' and 'research' charges

City watchdogs are threatening a clampdown on fund managers which routinely pass 'dealing' and 'research' costs onto ordinary investors.
Fund houses are making clients fork out for services such as 'corporate access' - speaking to managers of firms where they want to invest - which alone totted up to £500million last year.

 Chief watchdog: Martin Wheatley stressed that half of fund managers' clients are pension schemes and insurance funds, and urged firms to remember this
So-called 'hidden charges' like these have long come in for criticism from investors and campaigners, who believe they disguise the real cost of investing and erode returns.

Outspoken fund manager Terry Smith, who runs the Fundsmith Equity Fund, has also called for more transparency about dealing commission which he says often confuses investors.
Now chief regulator Martin Wheatley of the Financial Conduct Authority has stepped in to warn fund firms they are 'pushing the definition of research' by using client money for 'non-eligible' activities and not being open enough about it.
Wheatley has offered to work with fund managers to sort out charging issues, but said in a speech to the FCA's Asset Management Conference he would take a 'revolutionary' approach if necessary.
He highlighted the following concerns about the industry, which manages some £5.4trillion of funds on behalf of investors:

• Client money is only supposed to be used for a narrow range of research services and asset managers are supposed to disclose them to clients.
•  There is evidence of such services being 'bundled' with eligible and non-eligible costs mixed up together, and a lack of transparency about how money is being spent.
•  Examples of poor practice include firms spending client money on financial newswire subscriptions with Bloomberg and Reuters.
• Another involves a firm which doubled its research commission from the previous year because it did more trading, not because it received more research.
• A significant chunk of client commission is being spent on 'corporate access' services from investment banks and brokers, which cost an estimated £500million in 2012 just so fund managers could gain access to firms they wanted to invest in.

Wheatley said of corporate access services: 'We believe this is just one area where firms are allocating commission to ineligible services and paying more for services than they would if they had to pay for them out of their own money.
'This practice transfers the firm’s costs onto the client, which clearly works against the client’s interests. This raises a concern because asset managers do not control these costs with the same rigour as costs they incur directly.'
He said the FCA had no particular concern about the purchase of corporate access, but asset managers should be using their own funds if they want to buy it.
Wheatley stressed that half of fund managers' clients are pension schemes and insurance funds, and urged firms to remember this.
'This places a greater onus on us to remember where the money originates, and never forget that the sector must always act as agents of clients,' he said.

Campaigner: Gina Miller, pictured right, is calling for 100 per cent transparency on fund charges

The FCA will launch a consultation paper next month, and Wheatley said he wanted to reach a 'collective solution' with fund managers.
He welcomed a review of the fund management market which is currently being carried out by its industry body, the Investment Management Association.
Its boss Daniel Godfrey, who also addressed the FCA conference, said: 'The IMA has been conducting a significant review of this market for some months and we expect to be able to report our conclusions early in the New Year. 
'Our clear objective is to ensure we deliver the greatest possible value for money, transparency and accountability to our customers and we will explore all possible avenues to make sure we do just that.'
Gina Miller of the True and Fair Campaign, which calls for 100 per cent transparency on fund charges, welcomed the FCA's stance which she believes will force firms to operate in a more transparent system going forward.
She said it meant they would have to pay for research, which is the engine that drives most of what they do and should be included in their annual management charges to investors.
'They shouldn't be paying it out of client funds anyway. It should always have been part of the AMC in our view,' she said.

 

Miller said the FCA was tackling a lot of the issues her campaign has been highlighting for the past two or three years.
'They are saying transparency is key which is what we have been calling for. We will wait and see but the noises are right. We have to see how it works out in practice.'
Shaun Port of investment manager Nutmeg said: 'Today’s announcement from the FCA is music to our ears. For far too long now, the investment industry at large has been shrouded in hidden fees and bewildering jargon.
'It’s simply too confusing for people to understand how much they’re paying for their investment management services. Investors are being kept in the dark and that’s simply not fair.'
Terry Smith, chief executive of Fundsmith, said: 'Investors are encouraged to focus on the annual management charge and even the ongoing charges figure as if they include all costs.
'They don't, making it impossible for investors to clearly see what additional performance-eroding costs, such as trading and research, they will incur. This needs to change.
'At Fundsmith we do all our stock research in-house at our own expense and pay commission only for execution at 4 basis points (0.04 per cent), thus minimising costs to our fund and helping performance. 
'If fund managers had to pay for stockbroker research out of their own pockets I doubt they'd pay a fraction of what they now part with when spending their customer's money as trading commission.'