This morning saw the publication of the Financial Conduct Authority’s long-awaited final findings of its asset management market study.
It’s an important report, because the UK’s asset management industry is the second largest in the world, managing £6.9trn of investor cash.
Of this, more than £1trn is managed on behalf of individual investors and a further £3trn for pension funds. What goes on in the asset management sector matters for all of us.
What does the study consider?
The FCA launched their study back in November 2015, wanting to make sure the sector worked well for consumers and offered good value for money.
When they published their interim report last November, it presented evidence of weak price competition in a number of areas.
The final report confirms this weak price competition, with firms typically not competing on price. This is particularly evident for retail investors, who are perhaps the most vulnerable to the consequences of weak price competition.
The FCA has found evidence of considerable ‘price clustering’ on the charges for retail investment funds, with fees for actively managed funds remaining broadly stable for the past decade.
They also found high levels of profitability, with average profit margins of 36% in the firms they sampled.
With investment managers typically not lowering prices to win new business, this combination of factors indicate that price competition is not working as effectively as it could be.
Looking at performance, the FCA found a great deal of variability. Their evidence suggests that, on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees.
The additional analysis carried out by the FCA for this final report suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK.
They also noted that worse performing funds were more likely to be closed or merged into better performing funds. One consequence of this approach was to improve the performance of the closed fund, but the FCA found the performance of the receiving fund deteriorates slightly after the merger.
Within the report, the FCA also raises concerns about how asset managers communicate their objectives to retail investors, concerns in the investment consulting market (which relates to institutional investors), retail investors failing to benefit from economies of scale when pooling their money through direct-to-consumer investment platforms, and concerns about the value some investment intermediaries provide.
Remedies to these issues
In order to tackle these issues, the FCA is proposing to introduce a series of remedies.
They want to strengthen the duty on fund managers to act in the best interests of investors. This is a significant measure which will include placing obligations on senior managers at investment firms and introducing more independent governance on boards.
The FCA also wants to make it easier for fund managers to switch investors to cheaper share classes. They are considering the introduction of a sunset clause on trail commissions.
In order to improve disclosure, the FCA continue to support the disclosure of a single all-in fee to investors. This is coming into force at the start of next year for investors using an intermediary, as a result of the new MiFID II rules.
Investment consultants in the institutional space could be regulated in the future, which is a significant departure from current practice.
And the FCA will be launching a market study into investment platforms later this year, placing these under greater scrutiny to understand whether they are providing value for money.
What does this mean for investors?
An initial read of the report suggests this is positive news for retail investors, who should benefit in the future from greater price competition, transparency and improved market behaviour.
We hope the FCA keeps their resolve in the face of lobbying from this massive sector, and introduces the proposed package of remedies without too much watering down.
It’s important though that investors don’t wait for the regulator to take this action.
If you hold investment funds which are not currently offering good value for money, then vote with your feet.
With the help of a fee-based, independent Financial Planner, there is no reason to hold assets with expensive investment managers or direct-to-consumer investment platforms which fail to pass on the benefits of economies of scale.
There has rightly been an increasing focus on the cost of investing in recent years.
Scrutiny is needed at all stages of the value chain – investment funds, investment platforms and investment intermediaries – to ensure investors get a fair deal with what is, after all, their own money.
