Asset manager-client link is about to get stronger

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Are conduct risk rules going to shake up asset management in unexpected ways? That is the contention of Barry Neilson, business development director of platform Nucleus.

He is convinced that this is a significant beefing-up of the rules, which means poorly performing managers may be getting a wake-up call.

In his view, the rules mean platforms and advisers may need to alert investors when their funds are failing them. This could mean anything from straying dramatically from their objectives to over-concentrating risk or falling behind on performance.

“If you can see clients consistently underperforming, do we have to alert advisers and clients?” he asks.

The suggestion has huge implications. In recent weeks I’ve discussed the large pools of money that are seemingly immune to warnings about ‘dog funds’ or ‘black lists’. Billions of pounds stubbornly remain in what are effectively performance dead zones.

The relevant managers may well say they’re doing their best to maintain performance and manage costs, but the reality is it is very difficult to put fund managers on the spot if one suspects they’re not up to scratch.

Billions of pounds stubbornly remain in what are effectively performance dead zones. John Lappin

If Mr Neilson is correct, there will obviously be a huge challenge in distinguishing between longstanding neglect that leads to underperformance and what you could describe as “understandable underperformance” – because a manager’s fund is out of step with the current cycle.

Yet there could be a significant grey area between these two poles. A fund which, to all intents and purposes, is predicated on oil prices at around $80 would perhaps qualify for both categories.

Fund industry lobbyists and many advisers have long resisted any move to give managers responsibility for the end investor. The fund firms don’t want the responsibility; the advisers do.

But it is becoming increasingly apparent that asset managers are simply going to have to get to know clients a lot better – or at least communicate with them a lot more. For investment advisers themselves, this shouldn’t prove to be too much trouble from a technological point of view. But it may ruffle feathers psychologically. It could also have implications for advisers’ legacy books, particularly those clients who are not being given the requisite care and attention.

One bugbear for this columnist is the huge bank of funds purchased through, or on the advice of, banking institutions. Given they continue to derive substantial income from these ‘books of business’, it would be no bad thing if banks had to properly examine how well their investment offering stands up. It might also end some of the inertia I’ve mentioned.