IOSCO suggests four broad categories for fees and expenses paid out of fund assets
Fees and expenses cover both fees paid directly by the investors to the collective investment scheme (CIS) operator or its agent or associate, and any fees or expenses paid out of fund assets. International Organization of Securities Commissions (IOSCO) suggests that the latter fall into four broad categories:
The paper makes no observations on regulatory or other expenses that may be paid out of fund assets.
Investors should have the appropriate information to evaluate the fees and expenses of a CIS. Cost disclosure is key, as is the proper management of conflicts of interest that might otherwise misalign the interests of investors and of the CIS operator. Knowing where and how to obtain further information about fees and expenses is key for investors to make fully-informed decisions, no matter which distribution channel they choose.
Increased investor awareness may exert downward pressure on fees, as investors learn to consider them in their investment decisions. At the same time, the rise of new technologies has created a growth of web-based portals and tools that are changing how investors receive and interact with fund information, including on fees and expenses.
However, in some jurisdictions there are more complex distribution models, which may result in more elaborate fee-sharing or retrocession arrangements. IOSCO notes that regulators in those jurisdictions have put mechanisms in place to ensure risks to investors are carefully monitored. In others, the complete separation of the costs of product manufacture and distribution is required in an attempt to increase transparency of costs and reduce conflicts of interest.
The 2014 survey shows that in all jurisdictions the main remuneration method for the CIS operator is still the management fee. Also, all jurisdictions have adopted principles on transparency and disclosure, but there are differing approaches to implementing principles regarding conflicts of interest.
A few countries have forbidden the use of performance fees entirely, but the large majority of jurisdictions allow them subject regulatory requirements. Their use has generally increased in the past 20 years, though to differing degrees across different types of funds and across regions. They were originally introduced in CIS for institutional investors, but have become increasingly popular in retail CIS.
The 2004 report stated that transaction costs have a direct impact on the performance of a fund, but are hard to quantify and to forecast since they depend on parameters not known in advance, such as portfolio turnover and broker commission rates. The 2004 report suggested that 'Some information on transaction costs should be disclosed to investors. This information will usually be incomplete. It should however never be misleading.'
This consultation again states that it may be difficult to estimate a CIS’s future transaction costs for to a number of practical reasons. IOSCO notes that some argue for a single figure encompassing all charges and costs, including transaction costs. However, the CIS operator must then manage the number and volume of portfolio transactions in line with the fee, and some costs cannot be accurately measured in advance. Also, the absolute level of such costs over a given period might not, by itself, be a good indicator of whether or not the CIS operator had entered into transactions in the interests of investors.
The 2004 report recommended that transactions should always be executed on best execution principles and that hard commissions should not be a criterion in the choice of an intermediary to execute for the CIS. The use of hard commissions appears now to be less prevalent in the more mature securities markets. With regards to soft commissions, the latest survey reveals that regulatory regimes remain diverse across jurisdictions and are not expected to evolve in the near term. IOSCO specifically comments that developments in the EU could have a significant impact on the global industry, particularly on the financing of investment research.
Where commission-sharing agreements are permitted that facilitate payment to other brokers or independent providers of investment that benefit the CIS, IOSCO notes that they may help to manage conflicts of interest by reducing incentives for fund managers to accept bundled goods and services that add no value for the CIS and investors.
IOSCO is consulting on six pages of standards, with a response deadline of 23 September.