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Unpacking fund fees and charges in new transparency push

Glenn Freeman  |  24 Aug 2017Text size  Decrease  Increase  |  
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The financial industry's Regulatory Guide 97 will provide investors with greater insight into fund manager fees and charges, with Morningstar a leading advocate on your behalf.


The term "transparency" is an increasingly popular part of the language used by modern financial services organisations, regulators, and governments. Anecdotally at least, this has been largely driven by the global financial crisis and the intrinsic role opaque financial instruments and structures played within this.

In Australia, the introduction of the federal Future of Financial Advice (FoFA) reforms is the latest regulatory response in this regard--though it is by no means the first. It was preceded in 2002 by the Financial Services Reform Act and associated legislation, which changed the way consumers interact with the providers of financial services and their products.

Regulatory Guide 97 (RG97) is the Australian Securities and Investments Commission's (ASIC) latest compliance response to fees and cost disclosures, set to come into effect on 1 October 2017. It outlines how product issuers--including banks, insurers, and other financial companies--need to report fees and costs to their clients.

While it has received a mix reaction from different industry groups, there has been an extended consultation period, and Morningstar has been directly involved in this.

What does it mean for you?

"We see this as something very positive for individual investors," says Graham Dixon, Morningstar's head of data and retirement products, Australia and New Zealand.

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"While you may see a slight increase in the fees outlined in managed fund product disclosure statements and other product communications in response to the additional compliance burden managers are taking on, it's introducing even more transparency, which can only be a good thing."

He emphasises these aren't necessarily new costs, but also reflect other expenses that weren't previously clearly identified for investors.

Within its fund research, Morningstar collects detailed fee data about the products on which it has coverage. This allows it to do several things with the data, including:

- Using it for research purposes, including developing investor-centric reports on fees and charges for various sectors and types of investment products.

- Providing it to investment platforms, so they can in turn pass on clearer information to their clients, including end investors, and meet their regulatory obligations under RG97.

The combination of backward- and forward-looking fees is an important part of Morningstar's approach in this regard, reflecting the actual and projected performance of products.

When is this happening?

Morningstar's collection of this fee data will be finalised by 1 December 2017. The next step involves working closely with product teams, both here in Australia and globally, to incorporate the new fee data. A detailed timeline for this delivery process will be made public soon.

In the short term, you won't see many changes in the financial products you use, nor will any financial advisers acting on your behalf.

While RG97 is unique to Australia, as mentioned earlier, it is part of a long-term push for greater transparency across the global financial services industry. Regulations with similar aims to FoFA exist in the US (RegNMS and Dodd-Frank) and Europe (MiFID, MiFID II, and Solvency II).

As an important part of Morningstar's commitment to always do what is right for the end investor, it has adopted an active approach in these initiatives. Its solutions in Europe, in response to MiFID II, have been very popular.

Morningstar is also working on other transparency initiatives, including portfolio holdings disclosure. This involves progressing beyond the current industry standard of giving only the top 10 holdings to full disclosure of the underlying holdings that comprise manager portfolios.

Further information on this initiative will be provided in the months ahead.

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Glenn Freeman is a senior editor at Morningstar.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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