Transparency games

When is the last time you bought something without knowing how much you were paying? Better: when is the last time you bought something and whoever assisted you did not know the price of your purchase?

My guess is never, in both cases. Except if you purchased (hired) the services of an asset management company or a private bank in the handling of your investments. Whether you know it or not, you probably asked a few questions and got a few answers and came out with half the real picture. It wouldn’t have mattered if you were planning to invest a few thousand dollars or millions. A little like buying a car (Fiat or Porsche) knowing only the cost of the engine, the chassis, the four doors, the four tires and the halogen lights.

And what is the reason for this anomaly in what should be the most transparent of business engagements? The answer is not that simple (though it can be made much more so) and the story changes with every situation. Portfolio management mandates are relatively complex services; at the very least a client needs to know about management fees, product fees, transaction fees, custody fees and sundry “third-party” fees. Hence, the pricing can be easily mishandled – intentionally or otherwise; a few reasons for this are:

– Level of client interest. If you don’t care the chances of getting meaningless answers go through the roof.

– Level of integrity of your advisor. Like any retail situation, salespeople will not run the risk of losing your business by being overly solicitous with pricing information (passing you the documents with the fine print is easier and legal).

– Complexity of mandate. The more investments and types of investments you have or wish to have, the more difficult to pinpoint the cost of the total package.

– Strategic and tactical asset allocation changes. The mix of investments and strategies that you employ will affect the overall cost of your mandate; an exact measurement can only be done ex post though a good approximation should be possible any time.

– In one case someone suggested to me that the advisor “did not know” the fee structure; I think it’s implausible (who is not aware of his/her pay’s origin?) but certainly possible.

None of the above justifies the extent of the carelessness with which this matter is treated. Think about this: I have often asked on behalf of my clients for the overall cost of a portfolio; would you believe that no one has ever responded on the spot? It can take days for them to calculate it and if I need it sooner I must do it myself with the information provided (portfolio holdings, sometimes ISIN numbers, and KIIDs of several hundred pages). Computer systems have not been trained on the subject.

This should not be the case; the current state goes to the industry detractors’ benefit and hurts the credibility of all participants.