The FCA’s 112-page report on the UK’s £7 trillion asset management industry landed on my desk this week, calling for greater transparency and better price competition to rebuild trust and help people protect and grow their wealth for the future.
Met with mixed reviews, the report didn’t raise anything we didn’t already know. There’s limited pricing competition in the industry and a lack of transparency, which leads to overcharging. Whilst investors try to get their head around these pricing structures, some traditional asset managers are raking in big profits.
Pricing is an important issue. Proactive families that are trying to grow their hard-earned money are struggling to know exactly how much they’re being charged and what they’re being charged for. How can you work out your potential future wealth if you don’t know what you have to pay for?
What’s even more worrying is that there is evidence that investors are more likely to pick a fund with higher charges over a cheaper one in the same market, believing they’ll get better returns. The FCA, however, found no link between the two. I’m happy to pay, but I expect high quality to come with that extra cost, much like a good pair of running shoes.
The FCA also found that there’s £109 billion sat in what it calls closet tracker funds, which means investors are unknowingly paying higher active management fees for what is effectively a passive management service.
Funds can be split into two groups depending on their management style. Active fund managers have a more hands on approach to portfolio building in the hope of beating the market, although this means they demand higher charges. Passive fund managers track major indices to achieve the same returns as the market.
There’s nothing wrong with tracker funds; in fact, I often prefer investing in low-cost exchange traded funds to stock-picking. I just don’t have the disposable income, time, or expertise to achieve successful diversification by myself. ETFs allow me to have diverse exposure to an entire market, without the costly price tag.
Some passive funds also came under fire for underperforming their benchmark and charging people more than the average.
What has the FCA proposed?
Although important, the FCA’s findings weren’t a surprise, and the so-called remedies proposed by the FCA lack some gusto. I’m sure investment managers let out a small sigh of relief.
But the proposals are a step in the right direction; the FCA wants to standardise the reporting of costs and charges and increase the transparency of cost by adopting an all-in fee – including the asset management charge, estimated transaction costs and distribution fees. This will be consulted on later in the year.
Under Mifid II, regulation for European investment services, asset managers will have to include an all-in fee at every stage of the transaction, shown in percentage and numerical terms.
This will make it easier for investors to understand what returns they’re getting. If people are working hard to protect their money for their future, it’s only right that the asset management industry doesn’t take advantage.
The UK will have been stuck in a low interest rate environment for 100 months in July. The financial sector gives Brits the scope to make a return on their savings, especially as inflation accelerates.
Overhauling the charging and pricing structure and stoking competition is crucial to ensure people get value for money, maximise their returns, and improve their future financial wellness. I’ll raise a glass to that this weekend.
1 Ripping of customers is nothing new for asset managers, Financial Times, June 2017