Vanguard’s recent fee cuts have once again cast the spotlight on the massive profits the UK asset management industry is squeezing from investors.
Its decision to cut fees on lifestyle funds may spark a mini price war in this area, but it is unlikely to have any effect on the smug firms that routinely soak their investors for running mundane managed funds.
More than two months ago the FCA published its interim report on the asset management industry. In a nutshell, this report suggested the industry was charging too much for a mediocre service, and that private investors in particular were being targeted by high fees. It was a coruscating indictment of a smug, complacent industry that has still failed to grasp why consumers regard it as greedy and bloated.
Instead of taking the criticisms on board, the industry indulged in a predictable bout of self-justification. But the evidence is clear: the FCA found that while charges for passive funds have been falling, those for active products have remained stable.
Over the past six years average margins in the industry were an eye-watering 35 per cent – more than double the 16 per cent of the average FTSE All-Share company. Adjust for the fact that employees are sharing in the profits through wages and bonuses, and the profitability is even higher. Compare with the competitive world of supermarkets where profit margins can run at 2 per cent.
The report said: “The data suggests that profitability is high relative to market benchmarks. The results of our analysis are consistent with competition not working as effectively as it could.”
Since the report was published, the asset management industry has done precisely nothing – and it will continue to do nothing until shamed or forced by regulation to make changes. Financial advisers are in the front line of this battle. Of the £212bn of retail sales made in 2015, 78 per cent (or more than £162bn) went via the advice community.
Platforms likewise have a huge role to play, yet the interim report said they while they can negotiate discounts “these do not appear to be widespread”.
The asset management industry is built on myths. There is the myth that active management adds to performance. With few exceptions it does not. As the report noted the majority of active managers are underperforming their indices once fees are taken out.
There is the myth that active management needs significantly higher fees. But why, when most decisions these days are computer-driven? And there is the myth that an adviser who does not recommend actively managed funds is not doing their job properly. Again, that is rubbish as many excellent advisers can confirm.
Asset management not only lacks transparency, but is clearly unwilling to compete or offer value to consumers. Managers are, in many cases, deceiving the public and profiting from their ignorance – and the day of reckoning cannot come soon enough.