Financial advisers and fund platforms will be investigated by the Financial Conduct Authority to see if they provide value for money to investors, following a widespread probe of the asset management industry.
In a paper published by the regulator today (18 November), the FCA criticised the fund management sector for “limited” price competition for actively managed funds, meaning investors often pay high charges “not justified by higher returns”.
But the FCA's paper also revealed the watchdog has “concerns” about the value after cost provided by financial advisers and platforms, and is planning to look into the sectors further.
The paper, which details the findings of the regulator’s year long probe into the asset management sector, raises the issue of advisers ignoring cheaper passive funds.
“Platform best buy lists, third party ratings and potentially financial advisers may influence how retail investors allocate their assets,” the paper stated.
“Our findings suggest that the way the passive funds have been presented to investors might have resulted in some investors overlooking passive funds when making their investment decisions.
“Best buy lists, third party ratings and potentially financial advisers do not give prominence to passive funds, so some retail investors may not be made aware of the option to choose a passive fund.”
Potential issues with adviser networks and so-called ‘vertically integrated’ firms, which house both distribution arms and product providers, were also raised in the paper.
The FCA noted that where adviser networks may make funds available exclusively to financial advisers who are part of the adviser network, these networks have a commercial interest in promoting their own funds, as the network generates revenue from the investors that choose the in-house fund or portfolio.
How rigorous adviser networks are in selecting the fund managers that manage in-house fund of funds, whether the additional fee in a fund of fund arrangement represents value for money, and how the use of restricted investment solutions affects advisers’ advice were all flagged as potential issues in this area.
“For example, an adviser that is part of a network could be more inclined to pick a fund by relying on the network’s due diligence,” the FCA paper stated.
Model portfolios were another area where the FCA pointed to potential risks.
One of these risks was comparability, is that the huge selection and variability of types of model portfolios makes it difficult for investors and advisers to compare them.
According to the paper, one adviser firm the FCA spoke to pointed out that, while model portfolios can benefit consumers, it is difficult to compare and analyse performance of different types of model portfolios.
Choice of asset managers was another issue flagged by the regulator.
The growth of model portfolios could make it difficult for asset managers to access routes to market if the designers of the model portfolio only choose between a limited range of fund managers or include their own asset management as part of the portfolio, the FCA paper stated.