13th March 2012
"Transparency" is today's big investment concept. It's become a buzz-word – everyone's talking about it and few are willing to oppose it, at least openly.
For funds, it can suggest an uncurtained window, allowing investors to know what is going on with the money they've handed over to professional managers. But what do investors want or need to know that they can't access already?
For the traditional media, the transparency window is obvious. The media stress the need for total clarity over charges, including what some call a "multiplicity of hidden expenses", such as the cost of trading the constituent investments in a fund – these dealing costs are not shown in annual management fees or in total expenses ratio. Here's an example from Evening Standard columnist Anthony Hilton.
But while not diminishing the importance of costs on fund performance, there is another window which investors might find it useful to look through, one that could be open all the time.
And that's giving transparency to the investment process itself so fund buyers and owners would have more understanding of the how and why of the asset choices fund managers make on their behalf.
It's all about creating trust. In an age where so much information is freely on tap within seconds, professionals know that keeping consumer confidence means a dialogue. So doctors no longer talk about "the procedure" and have drugs labelled "the medicine". Most – admittedly not all – patients want to know what the medical professional plans and what's in their prescription so they can check it out online, an easy to access second opinion.
It's the same with investors and – if they use one – their financial advisers. And the big changes in the way funds are recommended and advisers are remunerated, due with the advent of the Retail Distribution Review next January, offer management groups a chance to give fundholders a new transparency.
RDR is scheduled to transform the world of personal investment as part of a wider shake-up of financial services.
Nick Cann, Chief Executive of the Institute of Financial Planning (IFP), a 2000-strong membership organisation for financial planners, says. "RDR has sought to create a market structure in which there is more transparency and which raises the professional standards of advisers; both factors that should increase trust and confidence in the investment industry."
This transparency should let investors know not just what is being done with their money but why and how.