Richard Butcher explains why the Cost Transparency Initiative is important, but could be lost in translation without a comparative.
I bought myself a new car fairly recently and, it’s fair to say, its probably the most teched up car I’ve ever owned. It does, without a doubt, provide me with the most data – almost to an overload level. It does the usual stuff; speed, revs, fuel level and outside temperature, but it goes well beyond that: oil pressure and temperature, distance left until I run out of fuel and, as that approaches, not only where the nearest garage is, but also how much they charge per litre of fuel. It’ll tell me how hard I’ve been braking. It’ll tell me (without my having to turn the radio on), what the news headlines are, the weather where I am and at my destination, and more, so much more. But it also does something really simple, but very clever.
When the car designers got together to consider what data to provide to the driver (lots!), they also realised that data, in isolation, is largely meaningless. What point telling me the pressure in my nearside rear tyre, unless they also told me what it should be, given the conditions currently being experienced? What point telling me how hard I had been accelerating without putting the efficiency (or not) of that on a scale? Why tell me the price of fuel only at the nearest garage when they could also tell me the price at the second and third nearest – allowing me to make an informed choice on where to top up. Data, they realised, is meaningless in this context without some sort of comparator.
Just recently the FCA published the investment cost disclosure template developed by the Institutional Disclosure Working Group (IDWG). This is a great development, although for transparency I must declare an interest; I sat on the IDWG, albeit I did absolutely none of the heavy lifting – that credit goes to others. For the first time ever, institutional investors, including pension scheme trustees and IGCs, will be able to see the total cost of investing. This will allow the sunlight of the market to shine in and disinfect those who are over charging their clients.
The IDWG has now been disbanded and a new replacement body, the Cost Transparency Initiative (CTI) – a joint effort by the PLSA, the IA and the Local Government Pension Scheme Advisory Board – has replaced it. They, once they’ve tested the pilot effort, will push the templates out to the investment community with the aim of making them the standard for cost disclosure.
The CTI will also amend and modify the template to reflect the testing, experience and the dynamics of the market from time to time and, in that capacity, I have a plea to them: data disclosed in isolation, in this context, is largely meaningless. It needs some sort of comparator.
Now, I have no doubt some commercially minded people will gather together all of the disclosed templates, extract the data and create some cost benchmarks (this is, in effect, the manifestation of the sunlight of the market) but that could have a couple of drawbacks. Firstly, there’ll no doubt be a cost to access the benchmarks (maybe a cost worth paying, but a cost nonetheless). Secondly, no two funds are exactly the same. Even vanilla funds, like passive UK equity funds, will have subtle differences, invalidating direct comparison to some extent. So the only true comparator for a fund is itself.
Generation two of the cost disclosure templates must allow comparison of the current year with the last or previous years with an explanation of the material differences. Transaction costs have gone up – why? Direct costs have gone down – thanks, but why?
Investment cost transparency will be a huge leap forward, but to make the most of it, the asset owners need the right tools to handle it. Comparators are vital.
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