More work is needed to improve transparency of transaction cost analysis (TCA), according to cosnultancy Bfinance, as it highlights the shortcomings of current regulation.

In a report titled ’Transaction cost analysis: has transparency really improved?’, despite efforts from regulators to improve asset managers’ transaction cost disclosures during recent years, with measures ranging from clauses in Markets in Financial Instruments Directive II (MiFID II) and packaged retail and insurance-based investment products (PRIIPS) to the UK cost transparency initiative and RG97 in Australia, Bfinance argued that disclosure “does not always equal transparency, nor does it necessarily drive good practice; indeed, it can do the opposite”.

It said: “These regulations instruct on the provision of a single final number combining explicit cost, implicit cost and dilution adjustment. The final number is very difficult to analyse or interpret.”

The report added that investors should look beyond a specific measure of price and consider other benchmarks such as the volume-weighted average price, open-close and high-low for “more comprehensive understanding of market dynamics and execution strategies”.

Bfinance also highlighted that the methodology for producing the number differs by region. For example, the European Union cost methodology establishes that the aggregated transaction cost figure cannot be lower than the explicit cost figure, whereas the UK cost methodology merely requires that the aggregated figure cannot be negative.

TCA was also criticised for failing to make relevant inefficiencies visible. The report said: “Aggregated reporting does not show up specific nuances, such as whether a broker is particularly poor in some markets versus others.

According to Bfinance, TCA lacks context on overall outcomes creating “fundamental complexity” for investors on whether lower costs equal better outcomes.

It said: “ For example, a manager that instructs the sale of stock whose price then rises when trading opens may enjoy an implicit transaction cost of zero while the manager who has instructed to buy that stock may suffer an implicit transaction cost, but the latter decision would evidently be preferred from the point of view of overall investment returns.”


A July survey of 200 senior investment professionals found just 23% were satisfied with “comparability” while the figures for “market impact” component of transaction cost were even lower, which the consultancy said it reflected the persistent low visibility of this cost element.

It added that in both cases, a very large minority of respondents indicated that they “don’t know” whether these costs were transparent, which it said illustrated an ongoing lack of awareness.

TCA still needs work

Bfinance concluded that TCA models “still need work” and investors should not expect asset managers’ disclosures to produce the transparency that is “required for good practice on this subject”.

“As with any regulation, investors must stay alert to the potential risk of unintended consequences. Once a cost becomes visible and has to be disclosed, there emerges an incentive to minimise that cost or at least the visible aspect of that cost, especially if the manager believes that the disclosed number may affect clients’ decisions. That incentive may not necessarily be aligned with the ultimate goal: maximising returns,” according to the report.

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