Investment companies have long struggled with cost disclosure, and despite the Financial Conduct Authority’s (FCA) efforts to clarify the issue, challenges persist.
A major concern involves how investment trusts report costs on retail platforms. Some platforms do not accept a 0% cost, despite the current rules allowing investment trusts to list their costs as zero. This creates a dilemma: disclose a higher figure that makes them seem more expensive and affects wealth manager fees or stick with 0% and risk being removed from the platform.
Gravis Managing Director William MacLeod described this situation as a “massive dilemma,” as investment trusts must decide whether to upset wealth managers or retail clients.
How Did This Issue Arise?
The dilemma dates back to September 2024 when investment trusts were exempted from MIFID II rules, which required them to disclose ongoing costs like open-ended funds. This exemption led to confusion, making it seem that fees reduced investment performance, a concern for open-ended funds but not for the share prices of investment trusts.
This change was seen as a victory, particularly for managers who held investment trusts in their portfolios. Previously, they had to factor in both the costs disclosed by trusts and their own, resulting in double counting.
MacLeod noted, “Wealth managers would rather seek lower returns and maintain a simpler relationship with their clients than explain that published figures on valuations are inaccurate.”
After the change, it was expected that trusts would list zero as their costs, making them more attractive to buyers, including multi-managers. However, the situation has proven more complex than anticipated.
The Core Problem
The main challenge now is that retail platforms’ systems are not designed to accept a 0% cost. If an investment company reports zero, it could be removed from the platform.
MacLeod explained, “If you report zero, hoping wealth managers will approve, you may find yourself de-platformed. Investment companies are left with a tough choice: which audience should they prioritize?”
Some platforms are willing to manually accept zero costs, but larger platforms cannot afford to process every submission. This has led to inconsistent cost disclosures. MacLeod admitted that trust managers are reporting different numbers, “unhappily but knowingly.”
For Gravis’ GCP Infrastructure Trust, MacLeod reports zero on platforms that accept it and 8 basis points on others, based on a five-year cost methodology.
Most platforms display multiple cost figures, leading to confusion. For example, platforms show the “full cost,” the manager’s fee (which is not a real cost), and the bid-offer spread, even though all of these should be zero.
Platform Responses
Trustnet reached out to four platforms: AJ Bell, Hargreaves Lansdown, Fidelity, and Interactive Investor.
AJ Bell has not removed any trusts but is waiting for the FCA and the industry to find a solution. A spokesperson said, “The forbearance of MIFID II rules has replaced one problem with another. Platforms want accurate, comparable information, which can only be achieved with uniform data.”
Hargreaves Lansdown confirmed it requires a non-zero cost figure. A spokesperson explained, “We believe clients can’t make informed decisions without clear cost comparisons.”
Out of more than 300 investment trusts on the platform, only three have been temporarily unavailable due to cost disclosure issues. Hargreaves Lansdown is working with trusts and regulators to find a fair solution.
Fidelity reviews cost disclosures for each investment trust and may restrict investments if the information is insufficient. A spokesperson stated, “We act in the best interests of our customers, and believe relevant costs should be disclosed to retail investors.”
Interactive Investor accepts zero costs but lists an annual management charge (AMC), which MacLeod finds problematic. He argues that using unclear language causes confusion for retail clients.
The Future of Cost Disclosure
Last week, the FCA concluded a consultation on new Consumer Composite Investment (CCI) rules, which aim to make it easier for investors to compare trusts with other investment vehicles. However, some industry advocates oppose this proposal, arguing that the unique nature of trusts makes them difficult to compare with other investment types.
The response document stated, “Regulations meant to protect consumers may mislead and harm investors. Trusts are already heavily regulated, and the new regime fails to account for the long-term benefits of trusts.”
As the industry waits for clearer guidance from the FCA, the cost disclosure issue remains unresolved.
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