Objectives published by many asset managers for their funds have been branded “ludicrous” and action by the Financial Conduct Authority (FCA) to force greater clarity in this area welcomed.
Jason Broomer, head of investment at Square Mile, scrutinises funds for the firm's managed portfolio service and fund research business.
He said he has never wanted to rely totally on quantitative models for evaluating funds, and always wants to discuss with managers the objective they are aiming for, and how they plan to achieve it.
But he said even he finds some of the objectives in the official fund literature to be "ludicrous".
"It could be a UK equity fund and the objective they have is to ‘achieve a return by investing in UK equities.’
"It is meaningless garbage that has probably been written by a lawyer or someone in compliance and it does not help.”
Mr Broomer’s comments follow the publication this morning (5 April) by the FCA of a 74-page report that introduces a range of new measures to force investment firms to be clearer about the objectives they are trying to achieve so these can be better judged by investors, as well as justifying the fees they charge.
Mr Broomer said any measures introduced by the FCA in this area will be welcomed by investors.
David Barron, chief executive of Miton Group agreed.
"What a fund seeks to achieve and how, and whether it delivers, is central to the value assessment," he said.
The FCA also highlighted the need for investment firms to show how they achieve value for money for clients.
At first glance, the regulator appears to have watered down the original aspiration to require fund managers to show “value for money” for their products.
Instead, the paper released this morning referred to firms being required to “assess and justify” their charges.
But Dan Brocklebank, UK director at Orbis Investments said what the FCA wants, "in the back of the paper, it talks about boards having to consider quality of service compared to market rates, and to consider value, I don’t think it really is watered down”.
Mr Brocklebank was particularly keen on the FCA’s thoughts on fee structures.
He said the regulator noted the “innovation” in the area of fees.
He said this is very useful as “it may be than when a new fee structure comes to market, people are cautious about embracing it".
"The FCA are never going to recommend something, which is fine, but the fact they recognise innovation is happening is significant,” he said.
That low cost does not necessarily mean better value for clients is recognised by the FCA’s decision to focus on “value” for investors, he said.
But Peter Toogood, chief investment officer at The Adviser Centre, said defining ‘value’ is going to be "hellishly difficult" - "the criteria probably needs to be at an industry standard level".
The FCA paper also stated fund managers will now be required to appoint to independent directors to their boards.
Mr Brocklebank noted this is a change, as when the idea was first floated, the proposal was for each individual fund to have two directors.
He said introducing new directors is an extra cost to be faced by small fund houses and may “act as a barrier to entry” for new investment firms wishing to enter the market.
A major problem is the “conflict of interest” faced by these directors, he said. They are supposed to act in the interest of clients, but will have their remuneration paid by the asset management company.
But he added the requirements, while potentially negative in the short term, may benefit clients in the long term if the directors are able to represent the interests of clients.
The FCA also decided against banning trail commission on legacy products at this time.
Ian Lowes, managing director at Lowes Financial Planning in Newcastle said this is the right decision by the FCA.
Mr Lowes said: “Around 3 per cent of our income last year came from legacy products, some of which can’t be changed, not least without significant implications.
"There are of course many facets to the debate. But consider a life assurance bond for example - if the fees were all provider fees, as they were pre-2013, and an adviser had a choice of taking commission paid by the provider of either, say 6.5 per cent initial or, 3 per cent initial followed by 0.5 per cent per annum ad infinitum and opted for the latter, is it fair to now rescind the contract?
"If the trail is switched off and the adviser seeks to charge the client’s ongoing fees separately then there are tax implications – it’s better for the fees to be paid by way of a commission from the provider than have an equivalent reduction to provider fees and have the client pay the intermediary from their bond withdrawals.
"As ever, nothing is simple and there are many unintended consequences of well-intentioned rules.”
David.Thorpe@ft.com
