Investments  

Asset management industry has room for improvement

Asset management industry has room for improvement

I am sure if the asset management industry were to review its school report, the headmaster’s summary would read: ‘Great potential – but must try harder’.

This is undoubtedly a massive generalisation and a number of chief executives will be grimacing or reaching for the phone to suggest I have no idea about what is going on.

I would counter this with the fact that the regulator shares my view – why else would it send such a damning letter to chief executives across the industry?

It contains numerous comments on reviews of the new practices that were introduced following the asset management market study – a paper that was very critical of the asset management industry and its poor handling of its fiduciary duties to the end client.

Focusing on five of the seven areas highlighted in the Financial Conduct Authority’s recent ‘Dear CEO’ letter, and leaving operational resilience and the fact that Libor will cease from the start of 2022 for others to comment on, let us examine the areas of concern and consider if they are justified.

  •  Liquidity – the reminder here, if one were required, being Woodford Investment Management.

This has left investors reeling and resulted in a media frenzy on how the industry should have seen it coming.

This is only the second time we have had an equity fund where trading has been suspended in the past 20 years, but it is essential that all risk and compliance departments take note and ensure the liquidity profile of their funds is in keeping with the daily dealing requirements of an open ended vehicle.

  • The Senior Managers and Certification Regime. This newly introduced requirement at the tail end of 2019 has yet to be scrutinised by the regulator, or the market, to see if it has been embraced in the spirit it was intended or if it has yet again been another tick-box project run by asset management groups.

I am optimistic, but the promised review by the regulator in the first half of 2020 will give us an initial answer on this.

  • The asset management market study. I would argue that a number of the proposed remedies have been introduced with limited success.

One of the key planks was the FCA’s PS19/4, which was designed to ensure that fund objectives were understandable and measurable.

Unfortunately, the evidence seen to date suggests that a number of asset managers have done little more than wordsmith these and they are still not fit for purpose.

A significant number of funds still have objectives such as to ‘deliver growth’.

I have been in the industry 30 years and have no idea what this means or how I could explain to a would-be investor what type of return or investment journey they may experience by investing in a fund with this objective.

There is also growing disquiet among asset managers as there have been inconsistencies in the approach taken by different case officers at the regulator, which has only added to the confusion.

The fund factsheet is probably one of the most widely used documents in the industry, yet the fund objectives it contains remain at best woolly and in some instances totally incomprehensible.

  • Product governance. This remains an area that the market has yet to fully understand or and has not yet been embraced by all aspects of the distribution chain.

One of the points that has been highlighted following the Woodford issue was the significant changes in the fund’s composition and how this should have sparked discussions with clients as to its ongoing suitability.