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What do ‘Terms and Conditions’ documents have to hide?

November 30th 2015

Key points
  • Complex Terms & Conditions can hide unexpected consequences for users
  • We have kept ours simple and readable

If you’ve ever bought a house then you’ll be familiar with how convoluted language can lead to ambiguity. The same can be said of investing. Traditional Terms and Conditions documents (T&Cs) – supposedly designed in the interests of the client – often fall well short of their purpose.

When was the last time you read your investment T&Cs cover to cover? You’d be forgiven that thinking life’s too short. Nonetheless, there’s always a lingering suspicion when you tick the ‘I agree’ box. Question is, what disadvantageous words have you missed in among those verbose documents?

Sadly, this is one of the ironies about a regulatory practice that is meant to protect the investor.

‘Terms and Suspicions’ - here’s 110 pages of (very) small print

We did some quick research by googling investment terms and conditions. The first example we came across were the T&Cs for a well-known global wealth manager. It contained 110 pages and almost 60’000 words – like reading Truman Capote’s Breakfast at Tiffany’s – TWICE. (And you can believe us when we say the T&Cs were a much drier read.)

And as if to highlight the irony, here’s the second sentence in the document: “In writing these terms we keep you, our client, first in mind. We know that your time is precious so these terms contain:” Then it lists the things it covers on the following 109 pages.

The contents included a four page section dedicated to defining the terms and abbreviations used throughout the document. Madness, you might agree. But when it came to defining the fees… well, that’s another story - as the IMA’s recent history of attempted cultural change in mutual fund industry has shown.

Unfortunately, this example is the rule rather than the exception in the investment industry. Such documents are barely able to masquerade themselves as client facing - more a legal document that’s sole purpose is to protect the firm.

Sifting through the noise

Unmanageable T&C documents exacerbate one big issue for investors: the principal agent problem in delegated investment management (the conflict of interest due to either misaligned interest or asymmetry of information).

Certainly, wordy T&C documents make it easy for investment managers to conceal (or at best dilute) hidden charges and their own compensation. While this is a key point, it’s one of many things to look out for in a T&C document.

At ETFmatic we make it our business to understand what our clients are buying into. Selecting the best ETF is about drilling down into the nitty gritty and rejecting unfair T&Cs on our side, too. We evaluate in-house all potential ETFs and then carry out due diligence on each that is under consideration. If we don’t understand something, we seek clarification - or just don’t use the product.

For example, the currency hedging strategy of an ETF could mirror a multi-currency index, be issued in euros and then cross-listed in London in pounds.

Some ETF managers will also deploy “efficient portfolio management” and offer underlying securities out for loan. As part of our service we balance marginal risks against marginal rewards in the best interest of investors – not conflicted by fee sharing with ETF vendors, for example.

These things might seem like small technicalities. Yet they can have a big impact, especially when things go wrong.

Keeping it simple

We challenge this sad but ubiquitous state of affairs in our own T&Cs. We set out to launch an independent platform that offers investors low, transparent investment costs. (In fact, ETFmatic’s solution is firmly rooted in the belief that traditional investment methods have a largely negative impact on investor returns).

As we only use ETFs, every ETFmatic investor receives a low one-off annual management charge which masks no hidden extras. That means no muddy total expense ratios.

In fact, the ‘Fees and Charges’ section of our digestible T&C document consists of just 31 words. Rather than explain them, it would be quicker to simply repeat them:

  • Investment management fee of 0.5% on assets under management
  • Transaction fees of 0%.
  • Custody fees of 0%
  • Any reports that are requested in paper format will carry a fee of £20.

Two of these points would be superfluous, were it not for the fact that investor’s experience with other firms means we feel the need to spell it out.

Something needed to change. The current T&C set up is not good for investors. One certainly questions the motivation behind such convoluted documents – which broken down is a simple confirmation of trust between a firm and its clients. Needless to say, the company’s team and its partners will be the first to sign up to our T&Cs when we launch.

Putting it to the test Print our terms & conditions