Fund managers provide very little information on unit linked funds

Brendan Logue had a good article on how fund managers are not very transparent in the way they price unit linked funds

http://www.independent.ie/business/...-sector-set-alarm-bells-ringing-29950151.html

Irish registered life assurance companies also operate unit-linked funds. While these life companies are regulated by the [broken link removed] ([broken link removed]), the operation of the funds themselves are not subject to Consumer Protection Code regulations. Consequently the level of transparency available to investors in respect of the funds is practically nil.


Life companies are obliged by the CBI to provide investors with an "annual benefits statement", but this shows only basic information about the price of the investor's units, their total value etc.


No information is provided about the trading operations of the fund itself. Information to do with the income and expenditure of the fund during the year or a statement of its assets and liabilities at the end of the year are not provided.


The calculation of the unit price is not revealed to the investor.
Attempts by the writer to obtain details of the unit-linked fund in which he is an investor were only partly successful. In particular the life company in question refused to disclose the details of the calculation of the unit price.
When asked for a copy of the financial statements of the fund, he was told that life companies do not produce income and expenditure accounts or balance sheets for unit- linked funds.

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Can a fund manager charge a fund what they like?
I understand that they can charge the fund third party costs e.g.

• purchase costs
• stamp duty
• Selling costs

But can they charge "internal" costs such as fund accounting, company secretarial,etc?



What if they make a mistake on the valuation? Are there any checks and balances?

Brendan Burgess said:

What if they make a mistake on the valuation? Are there any checks and balances?

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I have often campaigned that funds based in this country do not have to place the TER (total expense ratio) in their valuations. The rest of Europe must show the total extent of their charges but not here. If the Central Bank is regulating these funds., they themselves should insist on a change in practice.

Therefore as a pointer to investors, you'd be best served in investing in funds run in a squeaky clean country rather than the carelessness operated in this country.

I suppose they could add in "extras" but what is the point in that? The annual management charge pays for all of that. There's no point in adding in extra charges to the unit price as investors will just think that they fund is performing poorly and not invest.

I do agree though, there needs to be more transparency on all charges. Too many investors believe that the AMC covers the dealing costs on their fund.



Steven
www.bluewaterfp.ie

Brendan Burgess said:

Brendan Logue had a good article on how fund managers are not very transparent in the way they price unit linked funds

http://www.independent.ie/business/...-sector-set-alarm-bells-ringing-29950151.html



Can a fund manager charge a fund what they like?
I understand that they can charge the fund third party costs e.g.

• purchase costs
• stamp duty
• Selling costs

But can they charge "internal" costs such as fund accounting, company secretarial,etc?



What if they make a mistake on the valuation? Are there any checks and balances?

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Actually the big question is were the Retrocessions are buried... I've very limited exposure to the Irish asset management industry, but I think it is interesting that the topic never gets mentioned...

Hi Jim

What are "retrocessions"?

Brendan

Brendan Burgess said:

Hi Jim

What are "retrocessions"?

Brendan

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They are basically the portion of the fees charged by the fund that are given back to marketers or distribution agents for bringing the fund business. There was a big scandal in Switzerland a few years ago with them and some Countries have banned them. Not sure about Ireland though. Mifid II was supposed to deal with the issue but I don't think they ever did.

Brendan Burgess said:

Hi Jim

What are "retrocessions"?

Brendan

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Well as Sunny said they are fees paid by a fund provider to distributors (banks, advisors etc.) to enduce them to sell the fund to their clients. The payment has many different terms ranging from 'expenses' to 'commission' or 'bonus', but the objective is always the same! And while most investors would not be surprised to hear that a one off commission was being paid, they would be surprised that in some cases it is an annual payment based on continued client holdings. And of course in the end the investor carries the cost.

At present the EU proposal is that advisors will be required to return such fees to their clients (as is the law in Switzerland today), but the UK opposes it in favor of an obligation to disclose such payments - in the small print no doubt.

For a 1% AMC, 0.4% of it goes for advisor fees.

You are able to get a lower AMC if you pay the advisor yourself.



Steven
www.bluewaterfp.ie

For a 0.05%amc none of it goes to the advisor so you will only get this if you pay the adviser yourself.

The real issue here is that even "fee based" advisers in Ireland still typically sell unit linked funds from Insurance Companies in preference to more complex options.

Lack of transparancy is a big issue I agree but so is the lack of a more robust disclosure regime.

Marc said:

For a 0.05%amc none of it goes to the advisor so you will only get this if you pay the adviser yourself.

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Yes but to access a fund with that sort of AMC, I'm guessing you'd have to pay the advisor thousands up-front and more ongoing so unless the investment is at least €100,000 or more, the total cost the client pays is still chunky.

Dave,

I was actually referring to an ETF that anyone can buy without having to pay any adviser a cent.

Marc said:

Dave,

I was actually referring to an ETF that anyone can buy without having to pay any adviser a cent.

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Good man Marc - which ETF were you referring to?

Do-it-yourself investors can choose to invest through funds listed on stock markets and the two major fund categories include exchange-traded funds (ETFs) and investment trusts (the latter being referred as closed-ended funds in the US).

Funds listed on stock markets have lower costs (nobody selling them) and greater transparency than unit-linked funds, in my view. In terms of corporate governance, there's nothing to beat investment trusts. They are, in essence, companies and have a board, directors and an annual audit.

In terms of security of assets, both exchange-traded funds and investment trusts are legal entities in their own right and you and other investors, as part owners of the fund, are the only ones with a claim on the assets of the funds. This is not so with insurance company unit-linked funds.

Here, the insurance company owns the assets and gives the unit-linked fund investors a promise to pay the returns on the underlying assets of the fund - same as with bank deposits. While one does not wish to scaremonger, the reality is that anyone who had a pension or savings product from Irish Life, AIB or Bank of Ireland in September 2008 lost their investments (deposits) entirely as these banks failed. The savings grace was the ECB/Irish Government who bailed the system out and made good your assets. With ETFs and investment trusts, you own an assets, not someone else's I.O.U.

Rory Gillen
Founder, GillenMarkets.com

Rory Gillen said:

In terms of corporate governance, there's nothing to beat investment trusts. They are, in essence, companies and have a board, directors and an annual audit.

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Closed funds/investment trusts regularly trade at a discount to the underlying holdings and consequently can on a regular basis under perform the benchmark... as a general rule I would consider ETFs over such funds in most cases.

Rory Gillen said:

Here, the insurance company owns the assets and gives the unit-linked fund investors a promise to pay the returns on the underlying assets of the fund - same as with bank deposits. While one does not wish to scaremonger, the reality is that anyone who had a pension or savings product from Irish Life, AIB or Bank of Ireland in September 2008 lost their investments (deposits) entirely as these banks failed. The savings grace was the ECB/Irish Government who bailed the system out and made good your assets.

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Can someone help me with the meaning of this? Is he saying that unit linked funds were in danger at the time of the bank crash - which I don't think is true at all?