Ramsay report calls on fund managers to come clean on fees

A standardised definition for all fees, and their disclosure and purpose listed in one table in the product disclosure statement (PDS) of managed investment products were the underlying recommendations found in yesterday’s release of the Ramsay report by theAustralian Securities and Investments Commission(ASIC).

Conducted by Professor Ian Ramsay of the University of Melbourne, the study was the first part of ASIC’s review into how investment fees and charges can best be disclosed within the framework of the Financial Services Reform Act (FSRA).

Along with the call for standardised descriptions and definitions of fees and charges and their placing in a ‘fees section’ within the PDS, the report also called for the separate disclosure of administration and management fees and an improvement in the disclosure of entry/withdrawal and exit/withdrawal fees.

“The separate disclosure of both administration and investment fees enables investors to compare how efficient each of these aspects is across a variety of financial product. Investment management fees are the largest ongoing fees and it is important that the fee which is most directly related to the performance of the fund be separately disclosed,” Ramsay said.

The study also recommended that capacity for fees to rise and the effect of fees on returns over various periods be disclosed, and also called for their disclosure to be listed in dollar terms.

The report, which was conducted after consultation with key industry stakeholders, was compiled prior to last week’s disallowance of proposed FSRA regulations relating to the use of the ongoing management charge (OMC) measure in superannuation disclosure.

TheAssociation of Superannuation Funds of Australia(ASFA) welcomed Ramsay’s report yesterday and broadly supported its recommendations.

CEO Philippa Smith also welcomed last week’s blocking in the senate by Labour, the Greens and the Democrats of the proposed OMC proposals relating to the FSRA.

ASFA’s testing clearly demonstrated that the proposed OMC, a calculation based on certain ongoing expenses of the fund, was not an adequate tool for consumers, Smith said.

“It simply confused consumers - most (80 per cent) of those tested perceived it as an additional charge. Only 10 per cent could correctly answer the questions about fees and charges,” she said.

While ASFA agreed with the objective of the OMC (and Ramsay), Smith said the results of the consumer tests highlighted the need to develop an improved fee disclosure tool to enable people to better understand and compare products.

“We are currently in the middle of conducting our second round of testing alternative fee disclosure models, the results of which we hope to release shortly,” she said.

In his study, Ramsay said there was significant variation at present in the degree to which fees and charges were disclosed.

“This is evident not just in relation to a comparison of prospectuses for superannuation and prospectuses for managed funds, but also in relation to a comparison of prospectuses for the same products,” he said.

In his study, Ramsay also made a number of recommendations on periodic statements, but requested ASIC to inquire as to the cost of implementing some of these proposed changes.

“There should be disclosure of actual fees relating to a person’s investment (where this can be calculated) subject to ASIC obtaining information from industry about the costs of providing this sort of disclosure,” he said.

ASIC also announced yesterday the introduction of its on-line investment fees calculator, (one of the report’s recommendations) which it expects to be on-line early next year.