19 December 2016

Damning report by the FCA on the failures of active management industry summarised in our two part blog - reading it could save you £000's - Part 1

There was good news for UK investors when the Financial Conduct Authority published a long-awaited report on the asset management industry.

The report concluded that fund charges are often too high, that there is a lack of genuine competition on price and that investors are not being given a clear picture of how much they are paying to invest.

Announcing its publication, Andrew Bailey, the FCA’s chief executive said: “We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on returns.”

Although this is only an interim report — the final report isn’t due for several months — it’s being seen as a major victory for firms like Carbon as we have been campaigning for clearer charges and a better deal for end investors for years. The 4th of our seven investment principles is “Active buying and selling adds significant cost and erodes value”.

What does the report say?

The 200-page report is very wide-ranging, and several different parties are criticised, including financial advisers, consultants, governance committees and fund trustees.

Specifically about fund management the reports says this:

  • Because price competition for actively managed funds is limited, investors often pay high charges, and yet in most cases the returns they receive do not justify the premium they are paying.
  • Although there is more competition for passively managed funds, some passive funds are also providing poor value for money.
  • There is significant evidence of ‘price clustering’ — In other words, fund houses charging very similar fees for their products.
  • Fund managers often fail to state their objectives clearly and their performance is sometimes judged against an unsuitable benchmark.
  • Investment consultants are generally unable to identify those fund managers who will outperform in the future.
  • Fund management companies have enjoyed consistently high profit margins of nearly 40% for a number of years.
  • Although assets under management have grown considerably, there is no evidence that economies of scale are passed on to consumers.

What proposals does the report make?

The report proposes several changes, of which these are the two most important:

  1. There should be a bigger onus on fund management companies to ensure and demonstrate that they provide ‘value for money’. This would involve an overhaul of the current system of oversight boards. Boards would be required, “as a minimum”, to take into account all fees incurred by investors, including transaction costs, to consider alternative fee structures, and to publish an annual report detailing what they are doing to ensure value for money for the customer.
  1. There should also be an “all-in fee” for investment funds, taking in all the different fees and charges, to improve transparency and competition among asset managers.

In tomorrow’s blog we look at reactions to the report and what it means for the active vs. passive debate.

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