High upfront fees and inadequate disclosures in collective investment schemes (CIS), otherwise called pooled funds, are hindering their growth with penetration at only Sh20 billion.

A new survey has found that managers of the schemes fail to give advice to potential clients in terms of matching products to customer's investment objectives and risk tolerances.

The situation is made worse by the fact that many retail investors are unaware of the existence of the CIS (also called Collective Investment Vehicles) products. Even when they do, they are unclear as to how they operate.

Individuals frequently prefer to invest on their own, said the study commissioned by Capital Markets Authority (CMA) and conducted by Vista Capital-a financial advisory firm.

In Kenya, the penetration of CIS at Sh20 billion before the Safaricom IPO was five per cent of equity market capitalisation while this is higher in developed countries. In the US, for example, CIS take 36 per cent of market capitalisation.

Many unit trusts, for example, advertised in the Kenyan press only provide minimal information. It is therefore difficult for an investor to determine the actual performance of various CIS in the Kenyan market.

Managing director of Vista Capital Renee Blasky said disclosure of information on performance was the global best practice but this was absent in Kenya.

The study found that many CIS charge an upfront fee of five per cent or more of the amount to be invested which is much higher than the maximum 2.1 per cent brokerage commission charged when investing in shares at the Nairobi Stock Exchange (NSE).

It was also found that administrators and promoters of CIS such as unit trusts made no attempt to understand the customer's needs or even apply basic "know your customer" standards.

"All they want to know is how much you want to invest. They are interested in turning out brokerage fees," said Ms Blasky.

There is also a supply side constraint in the sense that many shares of the listed companies are not available for trading.

For example, many subsidiaries of firms with foreign-based parent companies such as StanChart and Barclays have no more than 32 per cent available at the NSE.

Participants in the study were of the opinion that there should be a formal certification programme for CIS managers such as level one pass of the CFA examination.

Those who attended a meeting at the Grand Regency Hotel called to review the study findings were of the view that an acceptable certification was critical but that was not necessarily a CFA one.

Ms Blasky said without the CFA charter one cannot be manager for CIS funds in Singapore.

The meeting was attended by fund managers, brokerage firms, unit trust managers, representatives of the Retirement Benefits Authority, Kenya Revenue Authority, and investment banks, among others.To improve on marketing of the CIS products, cross-marketing with different institutions such as brokerage houses, insurers and banks was seen as a viable option following a suggestion from a participant.

Ms Blasky saidshe had recently been surprised to find that two companies who offered a CIS product in Kenya promised an investor a return of 30 per cent - yet it was not possible to tell in advance the level of profit a CIS would turn out at the end of an year.

Isaac Njuguna, investment manager at Zimele Asset Management suggested that it should be possible for a CIS to be developed for an IPO alone. CIS was seen as a way to reduce the long queues of numerous individual investors trying to obtain a stake in a firm on sale.