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.“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.
Value for money was also flagged, as investors will pay advisory fees, model portfolio fees, underlying fund fees and potentially a platform fee, with each having an impact on returns.
Some industry commentators and stakeholders have raised concerns about third party rating providers’ business models, according to the FCA paper.
“They suggest that some rating providers do not offer a whole of market review and some rating providers have to manage a conflict of interest where an asset manager agrees to pay the rating firm for a licence,” the paper stated.
“We have also heard from asset managers who do not pay for a licence fees that they will then not be rated.”
“We have not conducted any analysis of how widespread these business models features are, or how greatly they affect fund ratings and financial adviser recommendations.
“Nevertheless, we would be interested in stakeholder views about whether this is a market trend that we should further explore.”
Approximately 78 per cent of retail investment fund sales in 2015 were advised, according to the FCA’s figures.
Similarly the paper noted that platforms have become an important part of the investment market, with over three million customers using them to hold assets or invest.
According to Platforum there are now nearly £145bn of assets held on ‘direct to consumer’ (D2C) platforms and over £340bn assets under administration (AUA) on adviser platforms.
Around 80 per cent of new retail investment business is now done through platforms (either directly by clients or by advisers on their behalf).
Retail investors do not appear to benefit from economies of scale by pooling their money together through direct to consumer platforms, the FCA paper stated.
Amanda Rowland, asset management regulation partner at PWC, said ultimately the FCA is suggesting a 'strengthened' duty of care be imposed to act in the best interests of investors.
She said: "This will considerably change the way the market operates and will be an enhancement to existing best practice.
"With the Senior Managers Regime comes accountability but today's study suggests something more - duty of care involves more direct and legally enforceable rights.
"The industry will need to work hard to demonstrate how it already best serves investors and how they intend to meet the concerns expressed."
laura.miller@ft.com
