Despite a heavily regulated finance sector, there are plenty of ways that fund managers can manipulate information to potentially mislead investors.
It can include stating their risky investments are “just like having the money in the bank”, selecting start and end dates to show performance in the best light, or reporting returns with only some fees and costs considered.
Investors need to dig into a managed fund’s product disclosure statement as it will tell investors much more than what is in the fund’s marketing materials.Credit:Simon Letch
Managed funds are collective investments for the masses, with investors’ money pooled with others and managed professionally.
Most funds are unitised and can invest in any type of market, whether particular sharemarkets or other investment classes. Their units are mostly priced daily to reflect the performance of the fund.
It is a brilliant business model for investment managers to aggregate investors’ money; however, it may not be as good for investors. A percentage of the money under management is retained as fees.
A report released last week by the Australian Securities and Investments Commission (ASIC) showed marketing and promotional materials of some funds had the potential to mislead investors.
Marketing guff will only tell you so much, even if what is in the guff is accurate.
The investment watchdog found that 13 managed fund providers across 18 different funds had substandard disclosures. The funds together manage about $1.4 billion of investors’ money.
One touted itself to be the “best-performing” fund without specifying the source of the claim, or the time period during which the fund was supposedly the best.
A fund manager who invests in mortgages said in its marketing materials that investors stood to earn more than they can with term deposits, while also making claims about the safety of returns that did not reflect the risk its investors were taking.
Another had advertised returns that did not adequately convey that they were only a target, rather than actual returns achieved by the fund.
Some provided returns in their marketing materials without also stating that past returns are not a guide to future returns.
Another made a made comparison of their returns with a low-returning index that was dissimilar to how the fund invests.
ASIC found the law had not been broken. The regulator expects fund managers to have balanced messages about returns, features, benefits and disclosure of risks in their marketing that needs to be clear and prominent.
The safety, reliability or security of an investment should not be overstated, ASIC says. The transgressors voluntarily amended their marketing materials following the regulator’s enquiries. However, it is a warning to investors to be sceptical of claims made by fund managers.
Marketing guff will only tell you so much, even if it is technically accurate.
Investors need to go beyond the marketing materials and take a close look at the fund’s product disclosure statement, where details must be provided by law. There you will find much more than is presented in marketing, including how the fund’s investment management fees are structured.
That includes where “active” fund managers – those who promise to outperform the market in which they invest – pay themselves a performance fee. This is paid to the manager as a percentage of the return that is above a certain benchmark. It is usually charged alongside the percentage fee that is paid, regardless of performance.
Sometimes, fee structures are complex, leaving investors unsure of how much they would actually be paying.
A fund manager can also have a “low-bar” benchmark that is easily achievable, leaving investors losing more in fees than if they had invested in a fund without performance fees.
The level of fees paid by investors is important. While the returns of the investment may be high or low, fees keep coming out of the investors’ money regardless.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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