FeesFeb 20 2017

Fund groups snub FCA’s all-in fee proposal

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Fund groups snub FCA’s all-in fee proposal

In November, the Financial Conduct Authority issued a report on the asset management industry which criticised the weak competition in the active fund sector.

One of its proposals was the introduction of an all-in-one fee which aimed to simplify the charging structure for investors and make it easier to compare the price of funds. 

But asset managers, including passive specialist Vanguard and active fund group Old Mutual Global Investors, have criticised this proposal.

Richard Buxton, chief executive of Old Mutual Global Investors, said a single charge that includes transactions costs could pose an unintended conflict of interest between asset managers and investors.

We have some concern this could increase the cost for investors, which is not a good outcome.Richard Withers

He said this proposal could actually provide an incentive for managers to cut down on the level of trading for reasons which are unrelated to markets.

Mr Buxton also warned the constraint on transaction costs might limit the viability of investment strategies that have a high turnover, even when these strategies lead to better outcomes.

Richard Withers, head of policy at Vanguard, said including transaction costs as part of the all-in fee could actually end up increasing costs for investors.

“If you purely have a figure that is setting out the all-in cost in advance, then we have some concern it might encourage providers to over-estimate the likely transaction costs that could be incurred over the year to ensure they stay in the parameter of the all-in fee.

“We have some concern this could increase the cost for investors, which is not a good outcome.”

Yet Mr Withers welcomed the idea of a simplified charging structure and said an all-in fee should cover operating expenses, such as audit, legal and administrative fees, but said the transaction cost should sit apart from that.

The policy head said fund groups should have disclosure of average transaction costs over the past three years so investors can make sure this is a good estimate of what transaction costs would be.

The New City Initiative, which is made up of 54 independent asset management firms based in the UK and across Europe, has also warned that the all-in-one fee might have unintended consequences.

Jamie Carter, deputy chairman of the New City Initiative, said investors should not be charged fees that fail to reflect performance.

While he said the single fee, which incorporates transaction costs, would make the charging structure easy to understand, New City Initiative members – which collectively manage around £400bn – have urged the FCA to rethink this proposal.

The network said transaction charges might be higher than expected because they are difficult to predict, meaning manager fees might not cover all costs which could then result in them making a loss.

Conversely, some managers may overestimate how much transaction costs are, resulting in a sharp increase in fees to the investor.

Meanwhile, the New City Initiative warned that bigger asset managers can leverage their purchasing power across the wider business, meaning the profits of smaller boutique groups could suffer a hit if an all-in fee is introduced.

The New City Initiative also stated comparing active fee structures to their passive counterparts is “not intuitive”.

Mr Carter said: “The FCA’s targeting of active managers as being expensive or uncompetitive on fees fails to account for the fact that active managers are better disposed to deal with adverse conditions in a market downturn.”

He pointed out that many boutique firms tend to deliver better performance than their larger peers, but the smaller companies are seeing their cost margins go up at a rate which is unsustainable.

He added: “Fees at boutiques have to reflect the cost pressures of doing business.”

Dan Brocklebank, head of Orbis Investments UK, which oversees more than £15bn, said: “The FCA's fee proposals might provide more clarity and transparency but they don't fix the core problem."

He pointed to the FCA's criticism that the industry's prevailing fee model seems to fail to align the interests of consumers and fund managers.

Mr Brocklebank added: "We have always believed in pay for performance - to us, it seems common sense.

While he said no performance fee is perfect, he said a fee structure where a manager does not receive a fee unless it outperforms is the fairest and most transparent way to operate.

katherine.denham@ft.com