The FCA’s investigation into the asset management industry could have a greater impact than the Retail Distribution Review (RDR) on the way fund fees are charged to clients.
The Asset Management Market Study interim report criticised the fund management industry for limited price competition among actively managed funds and stated that costs were not justified by higher returns in most cases.
A number of measures were proposed by the regulator to make the market more competitive and protect those who are least able to engage with an asset manager, such as a strengthened duty on fund firms to act in the best interests of investors and an all-in fee to help clients identify costs.
These suggestions could have a “way bigger” impact on the asset management industry than the RDR did in 2012, according to Nuclues chief executive David Ferguson, and could force fund managers to “bear the sharp end of the pressure on fees”.
“In 2014 we said the asset management sector was oversupplied, overpriced, underperforming and under attack from all sides. We said the regulatory examination of fee transparency and commercial pressure from index funds would help drive a collapse in fees pretty much all across the board. The great big thirty-year party was over and the hangover kicks in.”
Mr Ferguson said that he did not think that advisers or clients benefit from the collective buying power of funds as retail products cost about four times as much as their institutional counterparts.
He added that there is a significant spread between fund manager talent and the cost of their funds, and estimated that Nucleus clients are overpaying by as much as £100m every year for active management on the Nucleus wrap alone.
RDR introduced the requirement for financial advisers and providers of online investment platforms to charge their clients upfront fees for the services they provide, rather than accepting sales commissions form product providers.
This change was meant to reduce the risk of advisers and fund platforms recommending products that would pay them the most commission, rather than based on suitability for the client.
The FCA's market study could have more of an impact on the fund industry as it is aimed directly at asset management, while the RDR was meant to address financial advice, according to Adrian Lowcock, investment director at Architas.
"On the whole I think the FCA Asset Management Market Study will have more of an impact on asset managers than RDR. The latter was targeting the advisory sector and processes there and as such it only touched the asset management industry on a couple of issues," Mr Lowcock said.
But Jason Hollands, managing director at the Tilney Group, said that it is too early to gauge whether the market study will have a greater impact than RDR because it is still in its interim stage.
“Removal of commission resulted in a sea change if the remuneration model across the entire advice industry,” Mr Hollands said.
julia.faurschou@ft.com
