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Closer scrutiny of costs versus performance

Closer scrutiny of costs versus performance

Regulators around the world are still trying to deliver on a long-standing target – simple and meaningful disclosure about costs and performance. Some have now trained their sights on the level of costs and charges in funds, and determining whether those costs are justified.


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It’s not surprising given the longest bull market in recent history appears to be coming to an end, growth is slowing and budget-constrained governments are concerned about providing retirement pensions for their growing aging populations.

Taking their cue from investor protection agencies, media and bloggers – who write consistently about the too-high price of investing and the rise in lower-cost exchange traded funds – regulators are turning their attention to the amount of fees that investors are paying for investment advice, and specifically the fees being charged by investment funds.

The message is clear: there’s no place to hide on costs and charges. The spotlight on the industry is simply too intense to ignore. All fund management companies have to disclose fully all costs and charges in a way that is clear to investors. This will require firms to review their fee structure processes and demonstrate that they’re putting the investor front and centre.

From disclosure to cost

According to KPMG International’s Evolving Asset Management Regulation 2018 report: “Product governance and disclosures remain firmly in regulators’ sights, as do fund distributors in general and financial advisers in particular.”1

For example, on 1 January 2018 the European Commission’s Packaged Retail Investment and Insurancebased Products (PRIIPs) regulations came into effect. The regulations set out new calculation methodologies and transparency requirements for these investments. Among the key requirements: fund managers must provide Key Information Documents (KIDs) for their non-UCITS (Undertakings for Collective Investments in Transferable Securities) products that include an explanation of the main factors that impact the investment’s return, the level of risk, and a table explaining the impact of costs on an investor’s investment over time. The regulation is expected to be extended to UCITS at some point.

The focus on the actual amount of fees is new territory for European regulators because it falls under competition law, which is not part of their mandate. That said, they continue to push forward. For example, the European Securities and Markets Authority (ESMA) has received a mandate from the European Commission to issue reports on the cost and past performance of the main categories of retail investment, insurance and pension products. In effect, regulators are beginning to link performance to cost and asking whether the level of costs and charges is reasonable based on performance.2

UK regulators have gone a step further, requiring non-executive board directors of fund management companies to be held directly responsible for the value assessment of each of the funds.

In Canada, the Mutual Fund Dealers Association of Canada (MFDA), the national regulatory body, is pushing to expand further the way investment fees are reported to investors to include ongoing costs, such as management expense ratios. Nearly 10 years on from the introduction of the first phase of the Client Relationship Model (CRM), and over 3 years since the introduction of CRM2, such disclosures are not yet required under these rules.3

In April 2018, the MFDA issued a discussion paper asking for industry feedback on four areas not covered by CRM2: continuing costs of owning investment funds; transactional costs of owning investment funds, such as redemption fees and short-term trading fees; third-party custodial and intermediary fees to administer the fund but not charged by or paid to the registered firm; and costs of other investment products not currently included in the annual charges and compensation report.

Canadian regulators have also been active. In September 2018, the Canadian Securities Administrators (CSA), the umbrella group made up of provincial and territorial regulators, issued a proposal prohibiting investment fund managers from paying so-called ‘up-front’ commissions to the dealers, which can be covered by the management fees charged to a fund.

“The up-front sales commission payable by fund organisations to dealers for mutual fund sales made under the (deferred sales charge) option is a key feature of that sales charge option that gives rise to a conflict of interest that can incentivise dealers and their representatives to make self-interested investment recommendations to the detriment of investor interests,” said the notice published by the CSA.4

Canadian regulators are also looking to eliminate a commission paid to dealers who don’t do a ‘suitability determination’, on behalf of clients.

Closet tracking

Increasingly under the microscope of EU regulators are closet tracking funds – funds that mirror their underlying indices, despite being marketed as actively managed and charging an active management fee.

In Sweden, a public enquiry published in 2017 urged greater transparency with regard to how active a fund is and its tracking error. A study that same year by ESMA compared active and passive funds. The goal was twofold: to determine the extent to which actively managed funds beat their benchmarks and to compare the performance of active funds against passive products. A UK FCA report found that active funds provide poor value for money – a view shared by the European Commission. Based on the FCA report, in March 2018, the UK regulator demanded that asset managers compensate investors who were overcharged for closet tracking funds and that 64 closet tracker funds of 84 suspect funds investigated must change how they market the funds.

What fund managers need to do

  1. Understand the regulations are not just about disclosure. Increasingly, jurisdictions are asking for clarity around exactly what the fund does and how that translates into costs. This will require a mind shift and new approach on the part of investment managers and fund companies, and to apply this approach to existing funds as well as new product launches.
  2. Regularly review existing funds. This goes beyond assessing performance and includes ensuring the description of the product and the fees and costs are understood by investors, distributors and brokers.
  3. Establish processes to ensure you are listening to investors and understanding their needs. Collect feedback on fees, advice, value and act on it.
  4. Boards must demonstrate they have made disclosure and transparency a priority. While it remains the responsibility of fund managers to accurately and clearly describe the fund and the costs associated with it, the scrutiny on fund management companies has never been greater.


  1. Parting of the ways: Evolving Asset Management Regulation report (PDF 404KB), KPMG International, June 2018.
  2. ESMA receives mandate on fund performance from European Commission, European Securities and Markets Authority, 19 October 2017.
  3. Mutual-fund regulators push for more fee transparency, Clare O'Hara, The Globe and Mail Inc., 19 April 2018.
  4. Ontario pushes back against CSA proposal to ban certain embedded mutual fund commissions, Financial Post, 14 September 2018.
  5. No let-up on costs and charges (PDF 355KB), Chapter 4: Part of the Evolving Asset Management Regulation report, KPMG International, June 2018.

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