This has not yet materialised in to a formal discussion paper, consultation paper or policy statement, but the message is clear: The FCA is watching and will expect asset managers, and those distributing their products, to do better.
It is suggesting that current practices are not treating customers fairly, leaving industry participants in no doubt of what is not acceptable.
The study itself covers both retail and institutional, but for the purposes of this article I will concentrate on retail, although the expected behaviours of both are, and should be, similar.
The reason given for this study is that the FCA wanted to ensure that markets work well and as a result the consumer gets value for money.
Improvement in value for money means increased pension and savings pots and ultimately, not mentioned in the study, a reduced reliance on the state.
The AMMS is a weighty tome, in at excess of 200 pages. On the basis that the majority of investment clients have only three fundamental questions: How risky is it? How much will it cost? How much could I get? This is where the study encourages the provision of answers.
While the study is aimed at the fund industry, the findings, comments and opinions should equally apply to the segregated world of discretionary management.
Value for money
Publications from the FCA in recent years have encouraged advisers to think not in terms of pounds, shillings and pence, but in terms of value for money.
In other words, just because something is more expensive, doesn’t mean it isn’t good value for money in comparison to less expensive alternatives. To quote Warren Buffet, “Price is what you pay, value is what you get.”
One of the main thrusts of the study revolves around active versus passive. In simple terms, passive investing is a lot cheaper than active management and in many cases could be considered better value for money as charges are a drain on performance.
The evidence suggests that passive investing is lightly used and rarely appears on panels.
If we leave aside the eternal debate regarding which achieves the better long term performance, the study does pick up on some industry anomalies that should be considered when deciding whether or not to go down the passive route.
The average clean ongoing charge figure (OCF) for an actively managed fund is, we are told, 0.9 per cent. For a passive fund it is 0.15 per cent.
Quite a difference. Add to this that OCFs do not include transaction charges and again we are told that these tend to be higher for actively managed funds, which again is quite a difference in cost.
