News Analysis: Greater transparency needed

To a casual reader, these views might seem contradictory. In fact, the reality is more complicated.

Looking at the long-term arguments first, the demographic trends of an ageing population, the approaching retirement of baby-boomers and increasing global life expectancy are well known. Add to the mix the political difficulty of raising the retirement age, the growing costs of geriatric healthcare and unfunded public sector pension liabilities, and the need for greater private savings provision seems clear-cut.

Unfortunately, the less positive view is persuasive too. Asset managers face the toughest operating environment in decades, with increasing investor attention on management and performance fees.

The pressure to perform is increasing, and firms are being forced to commit scarce capital to product development. As I have noted here before, regulatory intervention is also growing fast and Ucits IV, Solvency II and the proposed Alternative Investment Fund Manager (AIFM) Directive are just three of the most obvious compliance challenges. The proposed increases in UK capital gains tax are also unlikely to incentivise greater levels of savings provision in the short term.

These difficulties are illustrated by the continuing wave of consolidation reshaping the industry. Small firms with clearly defined niches are surviving. This is because they 'stick to their knitting'. That is to say they focus on what they do well and leverage to their potential. However, the large independents are getting larger and recent deals highlight the trend for financial conglomerates to exit the asset management business. The large independents need scale to justify the fixed costs and therefore, the greater the assets under management (AUM), the greater the scale they can build in, specifically around operation costs.

To recap then, retail investors clearly need the services asset management can provide because these investors need to make better informed decisions around their pension provision and general wealth accumulation. This could be seen as complementary to the asset managers’ need to attract new net inflows to sustain their own economic model. However, despite these complementary goals I believe there has been a potentially dangerous breakdown in the link between asset managers and retail investors.

From the investor perspective, disappointment in historic investment promises has led to a lack of trust in asset managers. This is illustrated by the growing interest in low-cost products and those with some form of guarantee, and an increasing tendency to withdraw from poorly performing funds. Therefore it is incumbent upon the asset manager to rebuild the trust in their products, their services and their brand