Asset Allocator read the FCA’s recent ‘Dear CEO’ letter with interest.
Yesterday the regulator warned wealth managers about failing to meet their obligations to consumers - focusing on two areas in particular.
The first was the failure to prevent scams and fraud, as well as enabling money laundering, while the second was exposing consumers to inappropriately high-risk or complex investments and providing consumers with poor value products and services.
It is the latter concern which we will focus on here.
The FCA is holding chief executives responsible for undermining their clients’ trust “by pushing products or services that are too high-risk and/or too complex for most consumers”.
Further, it sees firms overcharging for undelivered services, overtrading on portfolios to generate high transaction fees, and providing unsuitably risky products to clients.
Other instances that the regulator noted include investment firms failing to provide clear fee disclosures that reduce investment returns, and managers not passing on fair interest rates in cash portfolios.
Lucy Castledine, the FCA's director for consumer investments and the author of the letter, says that on occasion, firms have charged holding fees for these funds, which further erodes the value and returns available to clients.
She told chief executives: "We will consider in future engagement whether you have taken appropriate action to rectify the root cause of any issues, which is often poor and ineffective leadership, governance, systems and controls and conflicts of interest management. We will take action if you have not.
"These are strong messages precisely because firms in this sector have an important role to play, given the trust that they are afforded by consumers to grow and look after their investments and support them through key life events."
Heather Hopkins, founder of consultancy NextWealth, disagreed with the regulator’s conclusions and said most wealth managers do a good job for clients in returns, savings rates, and peace of mind.
“Costs are coming down every year,” she said. “We've been tracking this since we set up NextWealth and advised clients pay an all-in cost of about 1.75 per cent. We expect this to fall further but when we have interviewed clients they feel the fees are fair.”
Now it is certainly true that we don’t see much in the way of overtrading among the portfolios we monitor. But the complaints raised by the FCA bring to light a variety of pertinent questions for wealth managers to answer.
In particular we wonder whether this focus on fees will accelerate the use of passively-managed funds, index trackers and ETFs as a means of avoiding high management fees.
Last week we covered Cathie Wood’s attempt to bring ETFs to the European market by buying a stake in Rize ETF.
We expressed a certain degree of scepticism about whether the demand for thematic ETFs among DFMs was all that big.
That broadly remains our view but, as an example, Rize ETF has an ongoing charges fee of between 0.45 and 0.55 per cent – lying more or less between the cost of a Vanguard S&P 500 tracker and a typical fee levied by an active manager.
The FCA’s letter ends on a vaguely ominous note: “We are conducting more short notice and unannounced visits where we deem it appropriate. And we are significantly increasing the use of our formal intervention powers for the worst cases."
In the post-consumer duty world, the need to justify fees and charges is in ever starker relief. The prospect of greater regulatory scrutiny may well accelerate many trends which are already in train.