In 2008, Phillip Coggan interviewed by The Economist said: “The fund management industry has done very well – but mainly for itself”.
The FCA's interim report on the asset management market study: interim report lays out extensive evidence to agree with him. The FCA report is very detailed and raises dozens of issues that it says lead to potential poor outcomes.
This article can therefore only be a summary of some of the issues and potential solutions that the FCA highlights for discussion before it issues the final report in 2017.
The report is highly critical of current asset management practices questioning the value provided, the excess profitability and poor governance. But it extends far wider drawing into its sights advice network products, investment consultants, research agencies and D2C platforms.
Why is this report important? Because the asset management industry manages £6.9 trillion of assets, of which £4bn is on behalf of millions of UK retail and pension fund clients. As the FCA says, small improvements in this vast industry can have significant benefits.
The FCA found evidence of: "weak price competition in a number of areas of the asset management industry. This has a material impact on the investment returns of investors through their payments for asset management services.
“We have found considerable price clustering for active equity funds, with many funds priced at 1 per cent and 0.75 per cent, particularly once assets under management are greater than around £100m. This is consistent with firms’ reluctance to undercut each other by offering lower charges.
"We also note that as fund size increases, price does not fall, suggesting the economies of scale are captured by the fund manager rather than being passed onto investors in these funds”. That is an issue because the whole idea of a pooled fund (unit trust or Oeic) is that investors are better off from pooling their assets together.
The issue of transaction fees has been brought to the fore in recent years by the active vs passive debate. The FCA is coming at it differently – investors need to have a clear idea of the total costs to be able to make better decisions. It therefore proposes introducing an all-in fee approach to quoting charges so that investors in funds can easily see what is being taken from the fund. It seems that cost clarity introduced by RDR is slowly working its way up the value chain.
