The end of the AMC is nigh... (and probably not before time!)

Thinking

The end of the AMC is nigh…. (and probably not before time!)

The ubiquity of the annual management charge (AMC) has permeated throughout the Life, Pensions & Funds Universe since my initiation into the Industry some twenty-five years ago. 

Back then as a Regional Consultant for London Life I well remember the various induction courses that took a bunch of eager young students through basic training on product, sales techniques, and of course, costs – as far as I was aware then – the AMC.

It therefore came as something of a surprise to me when, a few years later, on moving into a product management role I discovered the list of expenses that could be (and usually were)  taken from funds in addition to the AMC (see list 1 below). When calculated and added to the AMC of the fund in question this new increased charge became the Total Expense Ratio (TER) which, whilst being a fund specific figure did not always feature as prominently in fund marketing material as it might have and most groups still led their sales thrust with the AMC.  Astonishingly even the TER did not contain all of the costs effecting the fund. See list 2 below for those that the Collective Source Book (Coll) allows to be left out. 

To muddy the water still further in July 2011 UCITs IV brought along a new disclosure regime (effective July 2012 for pre-existing funds). This saw the Simplified Prospectus (SP) replaced with the Key Investor Information Document (KIID) and the TER replaced with an Ongoing Charges Figure (OCF). To date, Non UCITS Retail Schemes (NURS) have yet to make this approach mandatory (although they can choose to adopt it !) and so we are left with a mish mash of both approaches.

Confused ? If Industry professionals have trouble comparing fund pricing on a like for like basis we can only imagine how hard it must be for those outside of it, especially as the AMC is possibly the only charge they may be familiar with.

More positively, the True & Fair campaign and The Investment Management Association (IMA), have both been campaigning for the Industry to take a more consistent and fair approach to pricing since 2012, with the IMA advocating the use of the OCF as the lead figure to be used in product literature. The market moves slowly though and in May this year, the FCA’s Thematic review of Fund charging led to some Fund Managers being criticised for their literature still displaying a lack of pricing clarity.

The recent Retail Distribution Review (RDR) has also helped to highlight why the AMC is an out-dated concept – a major tenet of the RDR was a requirement for manufacturers to split out the cost of distribution from their products and launch new classes to reflect, effectively, the “factory gate” cost. Surprise, surprise when all of the calculators finished clicking most Fund Groups arrived at the same clean share price AMC whilst maintaining a plethora of differing OCFs !

Although still a widely used term in the industry the Annual Management Charge actually tells you very little. I’ll be very surprised if it survives as a concept for another year.

List 1 - Charges to be included in the TER calculation

  • management costs including performance fees;
  • administration costs;
  • fees linked to depositary duties;
  • audit fees;
  • payments to shareholder services providers including payments to simplified prospectus scheme’s transfer agent and payments to broker-dealers that are record owners of the scheme’s shares and that provide sub-accounting services for the beneficial owners of the scheme’s shares;
  • payments to lawyers;
  • any distribution or unit cancellation costs charged to the scheme;
  • registration fees, regulatory fees and similar charges;
  • any additional remuneration of the management company (or any other party) corresponding to certain fee-sharing agreements.

List 2 - Charges that can be ignored during the TER calculation

  • transaction costs which are costs incurred by a Simplified Prospectus Scheme in connection with transactions on its portfolio. They include brokerage fees, taxes and linked charges and the market impact of the transaction taking into account the remuneration of the broker and the liquidity of the concerned assets;
  • interest on borrowing;
  • payments incurred because of financial derivative instruments;
  • entry/exit commissions or any other fees paid directly by the investor.

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By Mark Forman

Mark leads Knadel's Retail & Distribution practice. Mark has over 20 years experience of leading successful initiatives across; strategic business development, distribution channel strategy, operating model design and product & proposition development.

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