By now, readers will be familiar with the FCA’s interim report into the competition, value for money and transparency of the investment industry, covering asset management and surrounding industries such as fund ratings.
I thought this was probably the most interesting, relevant and important report done on the investment industry.
For anyone in our industry, it is a hard read. We clearly failed our clients in aggregate, by charging handsome fees and adding no tangible value. The report highlighted conflicts, high fees with average returns, closet index trackers, a lack of transparency and an inability for fund raters and consultants to add value.
But, it should be game changing in a positive way for those who really matter: the end clients. If the FCA report ends up in actions that fix the issues, clients should be smiling – there should be lower fees, better alignment, fewer conflicts and greater competition. Above all, they should receive value.
As an industry insider, I feel shame and embarrassment. We overcharge, under deliver and are conflicted. An apology feels due. Let’s just recap on some of the findings, from a retail client’s perspective:
• On asset managers: they added no value above benchmarks, generally. An average, clients who paid more in anticipation of better outcomes did not achieve them. Many managers were closet index trackers. The FCA also found weak price competition – fund manager fees are similar and margins remain high.
• On fund ratings: performance of funds rated positively did not add value relative to benchmarks. Ratings firms were conflicted, receiving payments from the firms they rated. Backward-looking metrics showed no added value above benchmarks, even five-star rated funds. They also found that for retail clients who used “best buy” lists, these funds did not outperform benchmarks.
Surely these issues are easy to solve, with a bit of competition, disruption and innovation. Imagine a world where fund managers are paid only when they deliver. Why is it that competition does not solve this sort of issue and the FCA feels it needs to intervene? Why are there no innovative fee structures where fees to fund managers are withheld in trust, only paid when added value is evidenced? Or where ratings agencies are selected and paid on their track record of the performance of the funds they rate?
In theory, this FCA paper is a business plan for any disruptive entrepreneur. But where is the asset manager disrupter making a land grab? We don’t see them making inroads and shaking things up. In a sense, the FCA may have a point that competition might be problematic and therefore may take it upon themselves to drive changes through regulation.
What about fund ratings? Asset management not only supports its own stakeholders; there is a whole cast of third-party dependents like the fund raters, whose survival depends on the subsidies they receive from managers. We think this conflict will now be under more scrutiny, which is a good thing. Compliance officers inside fund management businesses are on high alert, and we suspect they have already walked over to the sales teams to ask why they pay fund raters.