Costs disclosure rules for investment companies have always been a thorny issue and attempts by the Financial Conduct Authority (FCA) to bring some clarity have not worked so far.
One particular issue is how investment trusts disclose their costs on retail platforms. Some refuse to allow a 0% cost, something that the current regulatory framework allows trusts to use.
So they face a choice, use a higher figure that makes them look more expensive (and influences wealth manager costs to boot), or stick with 0% but risk being de-platformed.
Gravis managing director William MacLeod said this was a “massive dilemma”, as they have to choose which of their two audiences to displease, the wealth managers or their retail clients.
So how did we get here?
The origin of the dilemma dates back to September 2024, when trusts were exempted from MIFID II rules that required them to disclose ongoing costs the same way open-ended funds do. This created the misleading impression that fees detract from investment performance, which is the case for open-ended funds but not for the share prices of investment trusts.
The move was welcomed as a momentous breakthrough, particularly by managers who own investment trusts in their portfolios. Investing in trusts was a hurdle for them, as they had to add their own costs to those disclosed by the trusts they owned – practically double counting.
“One can perfectly well understand why wealth managers would regard holding investment companies as detrimental to their relationship with their clients,” MacLeod said.
“They would be happier to seek potentially lower returns but have an easier relationship with their client than to have to explain that the figures that have been published on their valuation statements aren't factual.”
After the September overhaul, it was presumed trusts would start to disclose zero as their costs, which they were now allowed to do, making them look more appealing to buyers, including multi-managers. But this has proved more complicated than expected.
The crux of the issue
Cost disclosure is now facing an unanticipated obstacle – platforms. More specifically, platform systems that are not configured to allow zero as an acceptable cost.
If an investment company sends in its costs as zero, it may trigger a removal from the investment platform.
“If you send a zero, hoping that the wealth managers will be pleased, you could find that you are de-platformed by a retail platform. So as a consequence, the investment companies are faced with a massive dilemma: which of the audiences would they rather service?”, he asked.
“Would they rather send zero and please wealth managers but be potentially de-platformed, or would they rather send a number which pleases the retail platform but displeases the wealth manager?”
Different platforms behave in different ways. On receipt of a zero, some will manually intervene to accept it, but this is too much to ask from the largest platforms, which, given the high amount of data they receive, simply can't manually go through accepting every single submission supplied by investment companies.
While “nobody wants to put themselves in the position where they are reporting information which isn't correct”, trust managers are sending different numbers out into the market, MacLeod admitted – “unhappily, but knowingly”.
MacLeod himself, for Gravis’ GCP Infrastructure trust, is disclosing zero costs on the platforms that allow it and eight basis points on the others.
“We arrived at that figure because the majority of distributors use a five-year impact-of-cost methodology, and the bid-offer spread on the share price of the trust over five years is 40 basis points. So 40 basis points divided by five gives you 8 basis points.”
Most platforms resolved to present trusts with multiple costs attached – the “completely misleading” full cost, the managers’ fee, which is also shown as a cost despite not being one, the bid-offer spread divided by five that MacLeod and others are disclosing, or a zero.
“If you were to look at that platform, you'd see four entirely different presentations of a number, all of which should be zero.”
What do the platforms say?
Trustnet reached out to four platforms – AJ Bell, Hargreaves Lansdown, Fidelity and interactive investor.
AJ Bell has not intervened nor removed any trusts from its platform, waiting for the FCA and the industry to find a solution. A spokesperson at the firm said that the forbearance applied in relation to MIFID II rules “has simply replaced one problem with another”.
“Platforms want to provide customers with accurate and easily comparable information on costs and charges, but this can only be achieved if the data supplied by investment trusts is accurate and uniform,” they said.
“Given this and the overarching Consumer Duty requirements around customer understanding in particular, it is vital the FCA works with the investment trust sector to come up with a sensible way forward as a matter of urgency.”
Hargreaves Lansdown (HL) confirmed it asks trusts to provide a figure other than zero.
“This is because we do not believe clients can make an informed decision or comparison between other products prior to investment,” a spokesperson at the firm said.
Out of more than 300 investment trusts on HL’s platform, only three have been unavailable for HL clients to buy, the Sequoia Economic Infrastructure Income Fund, HICL Infrastructure and Renewables Infrastructure Group. The latter two have been reinstated onto the platform this week – HICL Infrastructure is now disclosing an ongoing charge of 1.14%, Renewables Infrastructure Group is disclosing 1.04%. The Sequoia vehicle remains unavailable to buy on HL.
“We firmly believe disclosure must be able to help clients understand the cost of an investment trust as a collective investment to support good decisions and client outcomes,” the spokesperson said.
“We have been working closely with the trusts on our platform, the regulator and trade bodies to find a solution that fulfils all our regulatory requirements including Consumer Duty in a way that is transparent and fair to clients. We’re confident our process is aligned to these obligations and will monitor any new guidance issued by the FCA.”
Fidelity reviews information relating to cost disclosures for each investment trust on its platform and will decide to restrict new investments if the level of information provided is deemed insufficient. Currently, this is the case for the Urban Logistics REIT (effective 24 January).
A Fidelity spokesperson said: “As a distributor of investment trusts, as well as mutual funds and other assets, we continue to act in the best interests of our customers and believe that direct costs and other relevant information should be disclosed to retail investors.”
Finally, interactive investor does accept zero costs but publishes an annual management charge (AMC) figure, which MacLeod took issue with.
“Part of this has to do with the language used to describe exactly what's in distribution. Some platforms have been very good at explaining what is a company expense and what is a client cost. But for a retail customer, that's quite a complicated message to understand,” he said.
“If you're displaying a cost but you will not pay it, then why is it called a cost? It doesn't make sense and it requires a conversation between two individuals because the written work isn't clear enough to explain what that number actually represents. I don't think the platforms have yet got to the point of being absolutely crystal clear in their explanation of what these numbers refer to.”
The firm has not replied to Trustnet’s enquiries.
The future of cost disclosure
Last week, the FCA concluded a consultation on the UK’s new Consumer Composite Investments (CCI) rules, which are trying to enable investors to compare trusts with other investment vehicles.
Industry campaigners have opposed the proposal, arguing that trusts should be excluded from CCI.
“We do not believe it is feasible to have a coherent and workable framework that operates across such a disparate range of investment vehicles,” the response document read.
“We have seen hugely damaging impacts from well-meaning regulations purporting to protect consumers, but which ultimately mislead and damage investor interests. These companies are already significantly regulated. The proposed new regime fails to recognise the unique characteristics and benefits of the sector for long-term investors.”