So, exactly a year after the terms of reference were published, the FCA has lifted the lid on the asset management industry’s Pandora’s box in what could well (and hopefully will) prove to be a landmark market study. If ever you had any doubts of the depth & range of issues, 689 pages of documents, research and annexes will confirm the scale of the challenge facing the FCA. Based on some rapid speed reading, here are some initial thoughts.
If you have better things to be doing than reading 600+ pages of research, or even the full 208 page market study, then I’d urge you to read the 22 page executive summary at the start of the document. Even at the highest level there are several hand grenades tossed at various parts of the industry, which really do make unpleasant reading.
For the FCA to be stating that “economies of scale are captured by the fund manager, rather than being passed onto investors”, alongside analysis to show the scale of operating margins achieved by the industry relative to every other industry you can imagine (spoiler alert…asset management is 2nd only to real estate) is a damning indictment. Investors take on most the risk as individuals, yet the asset manager reaps the rewards. The Investment Association has stated on behalf of their members that “Providing value for money for the UK’s saving and investing public is our industry’s driving concern”. Having read the report this morning it’s hard to hear that statement and not laugh. The evidence indicates the exact opposite.
Probably the worst example of this are the £109 billion, or if you prefer £109,000,000,000 in closet tracker or “partially active” funds. These investors are paying active management fees for little if any active management, which as the FCA reminds us “are considerably more expensive than passive funds”. Even the passive boys are not immune from criticism here, with £6bn invested in passive equity funds with an OCF equal to or above 1% for bundled or 0.5% for clean. Again, the FCA states that “investors in these products are likely to benefit from switching to better quality, lower priced passive funds in the same investment category”. This is an area where the report falls short – as much as it is difficult for the regulator to mandate and enforce on price, it is very unlikely these customers are being treated fairly. Elsewhere the report highlights just how difficult it is for the end investor to navigate their way through this complexity. If, as the FCA state “investors are likely to benefit from switching” then they should act to ensure this takes place now.
Another area that jumps out is the statement that “we have concerns about the value provided by platforms and advisers and are proposing further work in this area”. As the agent, advisers select and use platforms, so need to be included in any further work, but this does feel like it’s more aimed at the platforms themselves than the adviser. For a long while now we have questioned the value that platforms deliver for certain client scenarios, especially where the platform is delivering little more than custody. Why is the customer paying 35bps for custody?
Looking forward, the proposal to introduce an all-in-fee makes a lot of sense. Devil will be in the detail here, especially in how and when it is set. OCFs are a historic measure, so can be priced once costs have occurred. We’d like to see the AIF (© the lang cat) be far more static. The asset manager sets the price, and it’s up to them to control their costs to achieve a suitable profit. If they do, great, champagne & cigars all round. If they don’t, tough, the AIF can’t change.
Finally, it’s worth a quick reminder just how important this stuff is. I recently wrote about just how terrible the industry is in communicating with its customers, and the urgent need to improve household saving ratios. In a low interest rate and yield market, charges can destroy the value of your savings and investments, especially through the magic power of compound interest. The asset management industry contributes a huge amount to the UK, especially in terms of employment, but the current level of profit is immoral, and at the expense of the investor. This needs to change, and the sooner the better.