ISC Chronicle White Papers Contact Us

The Trouble with KIIDS

Return to library

ISC have just completed a project for a well known asset manager to recommend and employ an alternative operating model for the production of their Key Investor Information Documents (KIIDs). In successfully completing the project, we uncovered some interesting points worth sharing.

Background

A KIID provides investors with key information about a UCITS fund and were introduced in July 2011. The information is required by law to help the investor understand the nature and the risks of investing in a particular fund. The KIID is a two-page document intended to provide a consistent comparative tool for investors in the early stages of selecting a fund and must be read and understood by an investor before they invest. It includes fundamental information about the fund in plain, jargon-free language that should be intelligible to the average investor. Information is divided into five areas: Objectives and investment policy, Risk Profile, Charges, Past Performance, and Practical Information. The KIID has to be updated on an annual basis within 35 business days after a calendar year end, and intra-year where a significant change within the fund has occurred.

UCITS Approved

The challenge

KIIDs are a necessary evil! They have to be produced but who within the asset management firm should take responsibility for ensuring that this happens? Should it be Compliance, as it is a regulatory report, or Client Reporting, as they have the production skill set? Should it be Product Strategy, as they launch and manage the funds and share classes to which KIIDs relate, or the Performance/Risk team as they supply essential dynamic data, or some other team?

Then there is the volume and scalability issue. As a KIID is generally produced for all UCITS funds, sub funds and share classes, the typical asset manager can end up with a potentially large and unmanageable number of KIIDs to produce, all within 35 business days following year end plus potentially on an intra-year basis. Trying to fit that ongoing monitoring requirement and annual burst of activity into the period end process without an impact on resources is a challenge.

The majority of the information is static and only needs to be updated on an annual basis. With respect to the dynamic data, the calendar year performance is a straight forward piece of information that is generally available as a by-product of other reporting processes. The Synthetic Risk & Reward Indicator (SRRI) is simply the 5 year annualised standard deviation calculation for the historic share class returns which are then categorised to a scale of 1-7 (7 being the highest). It is supposed to provide the potential investor with an appreciation of the risk associated with the investment. Where the history of the share class does not extend 5 years, then a surrogate set of data (usually the appropriate benchmark) is used to fill the gap. There have been groans from within the industry as to the relevance of this measure but for now, it is here to stay.

Starting Point

Prior to this project, this asset manager used an external party to draft and produce the KIIDs but not a specialist provider. They had arrived at this point because KIIDs were new and they had adopted a short term solution to a long term requirement. Consequently, the operating model was not as efficient or economical as it could have been and the delivery was tactical. The resulting costs were high.

Solution

ISC analysed the requirement and recommended the best-fit solution and subsequently implemented this solution taking into account the organisation's capability to support each stage of the KIID value chain (Supply, Collate, Create and Disseminate).

KIIDS available

As part of the RFP process, 9 suppliers were invited to respond. What was surprising was the divergence in price. Some fees were off the scale and difficult to justify. In particular, a number of providers charged a very high fee for calculating the SRRI which is surprising given that the SRRI is the product of a simple standard deviation calculation. Some suppliers insisted on an annual service charge. Interestingly, a high proportion of suppliers offered an end-to-end solution that included translation and distribution services.

As part of the RFP process, 9 suppliers were invited to respond. What was surprising was the divergence in price. Some fees were off the scale and difficult to justify. In particular, a number of providers charged a very high fee for calculating the SRRI which is surprising given that the SRRI is the product of a simple standard deviation calculation. Some suppliers insisted on an annual service charge. Interestingly, a high proportion of suppliers offered an end-to-end solution that included translation and distribution services.

Given the client's infrastructure, organisation, resource availability and skill set, the most appropriate service provider was selected. The operating model that was implemented revolved around the use of an internal KIID Coordinator working with a third party specialist KIID production service provider. The result was a structured approach to delivering KIIDs within a framework that was economical and yet minimised the regulatory risk.

Lessons Learned

KIIDs only became a necessity in July 2011 and much has changed since then. The solution that asset managers put in place to meet the challenge of producing them may now be out of date; certainly the range of services offered by third parties has developed. If the asset manager has a 3 year contract with their current external provider, now is a good time to review the market alternatives. Alternatively, if the asset manager currently employs an in-house solution, there may be scope to improve the process, either through operating efficiency enhancements or by using an external service provider.

With the advent of PRIPs (Packaged Retail Investment Products) and AIFMD (Alternative Investment Fund Managers Directive) new flavours of investor information reporting will be required. So, with more KIIDs, or their like on the way, now is the time to prepare.

EU Flag

The operational structures of asset managers differ; no two are exactly the same, despite a huge overlap in their service offering. As such, what works for one asset manager in terms of KIID production may not be appropriate to another. Supporting the KIID production process in-house, or out-sourcing all or parts of the process to specialist providers are all options worthy of consideration. Significantly, the service offerings from most suppliers are now flexible enough to support a wide variety of models.

Lastly, it is worth noting that a number of high profile asset managers have opted to gain some positive PR by picking up the cost of the KIID process rather than passing it onto the fund. In this situation it could be argued there is an added incentive to ensure that the cost of producing KIIDs is kept to a minimum.

Return to library