IDEAL ADVICE

Foundation II Greater levels of transparency

not understand many key messages about charges, remuneration, conflicts of interest, and fund risks and features based on current disclosure regimes, and will commonly simply follow the advice of others. CESR chairman, EddyWymeersch, also pointed out last year 5 how difficult it is for investors to find information about products on promoters’ websites and urged the industry to make sure their websites contain what the investor needs. Hidden costs and lack of transparency in the financial intermediaries’ information on their tariffs make it almost impossible for consumers to systematically compare all the offers presented in the market in order to identify the one that is best for them 6 . In contrast to the US, where the SEC has harmonised the definition of and communication about fund fees towards investors, no single definition of fees and expenses exists in Europe. This transparency towards investors, which was first introduced by the SEC in 1988, resulted in total shareholder costs to decrease (see figure 6) over the years with more and more funds with lower fees receiving the most assets (see figure 7).

Acting in the best interest of the client is clearly necessary and a vital step in delivering sound financial advice.The next key principle for improvement in the quality of advice is increasing the current levels of transparency. State of play The investment fund industry is characterised by complex agency relationships and asymmetry of information. The assets are managed by institutions with considerable power to control the flow of information, on behalf of a dispersed group of investors with incomplete information. According to IOSCO 4 , investors do

20

%

2.32

2.05

1.98

Figure 6

2%

1.89

%

2.32

Total Shareholder

1.28

1.25

1.18

1.06

2.05

1.03

1.98

2%

0.99

0.94

0.92

1%

1.89

0.82

cost for Mutual Funds in the US

0.75

1.28

1.25

1.18

1.06

1.03

0.99

0.94

0.92

1%

0.82

0.75

1980

1990

2000

2002

2004

2006

2008

Stock funds Bond funds

Source: ICI Fact Book 2009

1980

1990

2000

2002

2004

2006

2008

Stock funds

103%

102%

101%