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FCA Market Review Helps Clients
Last week, the FCA released their final report into the asset management sector in the UK. We are usually averse to regulators intervening where competition can solve market dynamics, but on this occasion we were pleased. We noted at least five clear improvements to the end client and list them next.
The FCA found that institutional investment consultants and fund raters are often materially conflicted, whether this means they offer advice and products to the same customer – or they take fees from the fund groups they evaluate. These conflicts will now be increasingly dismantled or made a lot more transparent to customers. Furthermore, both parties tend to be unregulated and we see this changing too. So, future consultants and raters should be a lot more accountable and unbiased.
There was also a focus on buy lists and other sources of fund selection that seemed to show that investment consultants and fund raters were not adding value. This is painful to hear: as an industry, we spend much of our time trying to find good managers and yet evidence suggests that we aren’t any good at it. At least this is now flagged and the scrutiny should create more awareness of our collective need to evidence added value.
Questionable business practices by some fund managers are also being stamped out: like eliminating box profits and reducing fees on long-standing legacy clients inside higher fee classes. Active management fund costs are also coming down, noting how some had full fat fees with index tracking returns. There is also an interesting development with fund platforms: an expectation that platforms will start to negotiate institutional fees for clients. We suspect some platforms are larger clients of fund managers than many large pension funds, so watch this space.
There was a focus on value for money by asset managers too – where they are pressured to articulate the link between their fee and their added value (their value proposition). And, if anything, this prior lack of clear value proposition may well be why the drop in active fees has been indiscriminate – across good and poor quality funds alike. Cost transparency is also a clear focus, via an all in fee, which should make consumer choice a lot more informed.
Absolute return funds were also fingered for reporting returns against low benchmarks, when their targets were a lot higher. It may interest you that the IA Targeted return sector has delivered very low returns since launch in 2005 – inflation plus 1.25%, which is the same as short duration Gilts. And this, in a sector, where flows are significant and fees are high. No wonder the focus is significant. They now need to compare their fund returns to the high return claims that clients were often sold.
This is all very positive for the end clients and we think will result in a significant change to our industry. As conflicts are dismantled, coupled with a relentless focus on value propositions, we should see end clients receiving a lot better value. And if this wave of regulatory scrutiny is accompanied by a bear market, we could see a very different industry in a few yearsâ€™ time. Either way, we suspect it will be one in which the end client will be the winner.