You can’t blame the FSA for the high cost of funds

We’ve been reading this article. It suggests that the FSA is somehow responsible for the high-cost nature of the fund management business. Most FSA regulations are “principle based” rather than “rules based,”. So rather than “lay out in painstaking detail what fund advertisements can and can’t say, they lay out a general principle.” One that can be pretty much summed up as “don’t confuse consumers”.

As far as the Fool is concerned, this explains why we never see ads that “major on costs” despite the fact that they have such a major impact on long-term returns from any investment vehicle. I don’t buy it.

You can blame the FSA for all manner of things (and we often do), but it is ludicrous to blame the FSA for this. There is no actual ban on citing costs in ads. Just one – and a vague one at that – on attempting to do things such as bamboozle consumers by chucking piles of complicated numbers at them or by pulling out one unrepresentative number from a large pile.

In fact the only real requirements are that information in an ad should be communicated in a way “which is clear fair and not misleading” and that it should be “presented in such a way that is likely to be understood by the average member of the group to which it is directed”.

That seems entirely reasonable to me. And no barrier at all to popping the TER (total expense ratio) of a fund into an ad. After all, if an investor can’t understand a couple of basic percentages should he really be buying a fund at all? Seems to me that the “average member” of a group of people prepared to invest in an equity fund should be assumed to have a basic level of financial literacy. And if the costs of a fund are too complicated to be understood by the financially literate, whose fault is that? Not the FSA’s.

The real reason why you don’t see ads for funds majoring on costs is because that isn’t how the industry wants to compete – their business is far too lucrative for them to want to do anything that might end up cutting their margins. If everyone’s managing to cream 1-1.5% off their punters in management fees, who is going to rock the boat?

I’ve written here several times about how I hope the RDR (retail distribution review) will force the industry to compete more on cost, and there have been encouraging developments here. But fund managers like making lots of money – they aren’t going to start competing on price until they have to.

One day you’ll see an ad in the tube advertising a fund with a large number telling you how low its costs are, rather than with an irrelevant picture of a mountain, planet, burning torch or big game hunter. You won’t see it soon but when you do you’ll know that the fund management industry is finally competing in the same way as all other industries: by promising value for money.