It seems cost transparency has come of age. We have MiFID 2, the FCA’s Institutional Disclosure Working Group (IDWG) and the follow-up Cost Transparency Initiative (CTI), and now the just-released House of Commons Work and Pensions Committee ‘Pension Costs and Transparency’ report. All of these lead to the inescapable conclusion that pension funds need to take cost collection seriously, and asset managers (and other suppliers) must accede to demands by clients for cost data. It really is as simple as that.
But it certainly has taken a long time to get here. I’ve been pursuing this outcome now for 11 years, but there were others before me. In fact, I first focused on cost transparency as an issue after an enlightening conversation in 2008 with fund manager David Norman who explained that what asset managers incurred as costs and what they charged to clients were two very different things. Up until that time, and as a management consultant, I had worked with asset managers to put together and rationalise operating models. Therefore, I had a very firm idea of the costbase of an asset manager. But what I really hadn’t thought about was how much asset managers and other suppliers actually charge institutional (or retail) investors for their services. David told me how much and something just clicked into place. My decade-long confusion about the pay disparity between financial services and other sectors (such as my former career as a Police Officer) evaporated. It’s why the FCA in its Asset Management Market Study (2017) highlighted that the average profitability of asset managers was 36%; an exceptional figure.
That level of profitability from your suppliers should be enough to make you, the institutional investor, pay attention and ask some firm questions about how much you are being charged. After all, their profitability is derived entirely from your assets. But it’s not that easy, it seems.
Firstly, asset managers are somewhat nervous about the issue of data; not only have they never collected it before and their systems are likely to be poorly configured for the job, but who knows what such data will reveal? Think St James’ Place and the deluge of complaints recently reported in The Sunday Times and Money Marketing about their charging structures.
Secondly, you the asset owner, probably have reservations too.
Perhaps you believe, or are being told, that the data isn’t yours and you cannot demand it. Well, simply put, it is yours and you can. How much you are actually shelling out for a service is possibly the ultimate expression of your relationship with that supplier, so demand away. Certainly, if someone says ‘no’ to your request then you definitely want the data, if in only on principle.
Perhaps you believe, or are being told, that net performance is all you need. Suddenly, you are instead told that you need more information than just net performance and that the way you are charged is actually incredibly complex, and multi-layered with both explicit and implicit components. The CTI templates are your guide to collecting and digesting these complex charges, but the templates are brand new and are, to those who have either loosely or never before asked for cost data, very confusing. I can say from experience that the reaction of some institutional investors is to say “Oh my goodness. This is so complex and I have other things I need to do. Let’s park this for now. And it’s probably going to cost us a fortune to collect and understand anyway. Let’s wait until next year”. On top of this, who knows what the results will show when the entirety of your third party cost-base is revealed.
The journey to cost and fee transparency is therefore not simple despite the efforts of the FCA and the CTI.
At least it is currently voluntary. But not, I suspect, for long. One of my regrets in writing the recommendations as Chair of IDWG was that I couldn’t mandate cost data collection by institutional investors. The FCA does not govern the institutional investor community (other than in Independent Governance Committee (IGC) world) and so this recommendation was not an option. However, if I read the Work and Pensions Committee report correctly, voluntary cost data collection using the CTI templates is likely to change.
Currently, only IGCs are required to report Value for Money (VfM) in their annual Chair’s Reports. Despite this compunction less that 25% of last year’s statements contained anything detailed or constructive on costs. Frankly, I, like Henry Tapper who reviews every statement each year on his Pension Playpen blog, am flabbergasted by this. To attempt to discuss VfM without raising the issue of how much you have actually spent is inconceivable; the very essence of VfM is ‘value delivered’ for ‘money spent’. The point is that IGC’s are required to report on the ‘money’ part and soon so will all institutional investors. The key phrases in the Work and Pensions Committee report are “…some trustees are making investment decisions without a clear understanding of how much those decisions cost…”, which echoes the original findings of the FCA and alludes to the CTI templates. Couple this with “…we are not convinced that there are sufficient incentives to achieve a high take up through voluntary disclosure alone…” and you have potential compulsory collection of data by institutional investors from asset managers using the CTI templates.
As if this wasn’t enough I can now say that those who are experienced at cost collection in some form or other get the best deals. That there are scale economies in procuring asset management is well known, but there are those pension funds that fall below the cost/size scale curves and these funds are those that have made efforts to collect cost data in the past.
And the longer you’ve been doing it, the better your information and the more strident your requests, the better your costs.
Asking and then negotiating, it seems, are the first steps to reducing your costs and improving VfM. This is a finding that echoes what happened in Holland when it introduced its cost collection framework some eight or more years ago.
How do I know this? I know it because I now have data. A lot of data. When I finished my time with the FCA I decided that, in the absence of compulsory cost collection, what was needed was something to make cost collection easy and cheap. So I built a cost collection platform to automate the process of collection and data analysis as much as possible. And because I want to complete the transparency journey, think of it as my quest, I have created it as a utility and it is therefore cheap. It’s called ClearGlass. And here’s the interesting thing: despite the bullish statements by the Work and Pensions Committee, it seems that funds really do want their cost data. Since our launch in January this year we have onboarded or are currently onboarding 175 pension clients with assets ranging from £100million AUM or less, up to £50billion AUM, with a total AUM of almost £250bn. This is in only seven months. These funds are of all types (DB, DC, Master Trust, Fiduciary), and use all types of products including private equity, LDI, hedge funds, credit, insurance-linked, as well as more routine strategies. In fact, we have obtained, or are obtaining, data on over 1250 products from over 180 willing asset managers.
We are also working with all of the large consultants to onboard their clients to the platform and our pipeline is some 2000 funds pending over the next 6-12 months.
I’m therefore pretty positive about the general direction of travel of cost transparency.
The point is, I have an empirical dataset (and I believe the largest ever assembled), on which to draw my initial conclusions.
Cost collection is, therefore, here to stay, and compulsory collection by institutional investors using the CTI templates is likely to form one of a suite of recommendations by the DWP. But how will you, the institutional investor, actually collect the data? There are several options: you can train your staff and do it yourself; you can ask your consultant to do it for you; or you can go to a third party specialist like ClearGlass. I’ll welcome you if you do choose to use us, but won’t be upset if you don’t. Everyone has a preferred supplier. But please remember this: ‘Collecting Costs should not be Costly’, so don’t pay through the nose. There are too many layers of cost already.
Dr Chris Sier
Chairman – ClearGlass Analytics, Former Chair – FCA IDWG