Last month the FCA released its final report into the UK’s asset management sector. We are usually averse to regulators intervening where competition can solve market dynamics, but on this occasion we noted at least five clear improvements to the end client.
The FCA found that institutional investment consultants and fund raters are often materially conflicted – whether this means they offer advice and products to the same customer, or they take fees from the fund groups they evaluate.
These conflicts will now be increasingly dismantled or made a lot more transparent to customers. Furthermore, both parties tend to be unregulated and we see this changing too. Therefore, future consultants and raters should be a lot more accountable and unbiased.
There was also a focus on buy lists and other sources of fund selection, which seemed to show that investment consultants and fund raters were not adding value. This is painful to hear: as an industry, we spend much of our time trying to find good managers and yet evidence suggests that we are not any good at it.
At least this is now flagged and the scrutiny should create more awareness of our collective need to evidence added value.
Questionable business practices by some fund managers are also being stamped out, such as eliminating box profits and reducing charges for long-standing legacy clients inside higher fee classes.
Active management fund costs are coming down, with the FCA noting how some had full fat fees with index-tracking returns.
There is also an interesting development with fund platforms: an expectation that they will start to negotiate institutional fees for clients. We suspect some platforms are larger clients of fund managers than many large pension funds, so watch this space.
The watchdog also focused on value for money from asset managers, where they are pressured to articulate the link between their fee and their added value – their value proposition. If anything, this prior lack of clear value proposition may well be why the drop in active fees has been indiscriminate, across good- and poor-quality funds alike.
Cost transparency is also a clear focus, via an all-in fee, which should make consumer choice a lot more informed.
Absolute return funds were fingered for reporting returns against low benchmarks, when their targets were a lot higher. It is interesting to note that the IA Targeted Absolute Return sector has delivered very low returns since launch in 2005 – inflation plus 1.25 per cent, which is the same as short-duration gilts. And this in a sector where flows are significant and fees are high. No wonder the focus is significant. They now need to compare their fund returns with the high return claims that clients were often sold.
This is all very positive for the end clients and we think it will result in a significant change to our industry. As conflicts are dismantled, coupled with a relentless focus on value propositions, we should see end clients receiving a lot better value.
If this wave of regulatory scrutiny is accompanied by a bear market, we could see a very different industry in a few years’ time. Either way, we suspect it will be one in which the end client will be the winner.
Rory Maguire is managing director at Fundhouse
