Asset managers need a big shake-up, says the FCA, the financial regulator


Asset management companies, which invest money for their customers, aren’t giving value for money and there needs to be a shake up of the industry, according to the FCA, the regulator.

The Financial Conduct Authority, the FCA, has been investigating the asset management industry. This industry is worth £7 trillion and includes pension funds and investment funds. The FCA found:

  • Asset management companies don’t compete on price. The regulator said that there is ‘weak competition on price’. That means that companies that charge more aren’t necessarily losing customers to companies that charge less. In particular, the regulator found that whereas pension funds and other large investors get offered lower charges by the asset managers that invest their money, the same does not apply to funds that individual investors put their money into.
  • Asset management companies are making large profits from managing individual investors’ money. The average profit margin is 36% across the firms that the FCA looked at.
  • Performance: Neither actively managed nor passively managed funds (otherwise known as trackers) outperformed the relevant stock market index after charges had been taken into account. There’s currently a big debate about the merits of active management versus passive management. Many industry experts believe that passively managed funds, which track a particular index, are a better bet because the charges are much lower than for active funds.
  • Performance and charges: There’s no link between a fund that charges more and one that performs better. But the FCA did say there is some evidence of a relationship between a fund that has high charges and one that doesn’t perform so well. This could be because the high charges have a much bigger impact on the returns, rather than because the fund is badly managed, but the FCA didn’t look into this in detail.
  • Assessing performance is very hard. It’s often said that ‘past performance is no guide to future returns’, but that’s exactly what the FCA found. It says that you can’t look at a fund that’s performed well in the past and say that it will do so in the future. What you are able to do is look at one that’s performed badly and say it’s more likely to perform badly in the future.
  • Worst performing funds are often closed or merged into other funds. If funds are merged into other ones, the fund that was doing badly does tend to perform better, but the fund it’s merged with tends to perform a bit worse.
  • Many funds are closet tracker funds. There are around £109 billion in active funds that essentially do little apart from mirror the performance of a (much cheaper) tracker fund.
  • Awareness of charges is low. Many investors aren’t aware of how much they’re paying and what they’re paying for. That’s not surprising when, at the moment, it’s hard to tell exactly what the charges add up to. Worryingly, the FCA found that some people weren’t aware that they were paying charges at all.
  • Individual investors don’t benefit from ‘bulk buying’. Whereas large pension and investment funds pay much lower charges for their investments to be looked after, large funds that look after individual investors’ money pay higher charges. Even if they’re of a similar size.

What should happen next?

The financial regulator, the FCA, says a number of changes should be introduced. Some of them seem so basic or obvious, it’s surprising that they need to be introduced at all.

SAVVY TIP: For a number of years there’s been an over-arching principle called ‘treating customers fairly’, which all financial companies are supposed to adhere to. From this investigation, it seems they’re not.

The FCA wants to:

  • Strengthen the rules saying that funds should act in the best interests of investors. This seems obvious, but it’s  something that the regulator feels it needs to spell out.
  • Make funds return risk-free profits to the fund. What this means in English is that funds should not hold onto profits that they’ve generated without taking extra risk.
  • Make it easier for fund managers to switch investors to cheaper share classes. ‘Share classes’ is jargon you may not have heard of, but it basically refers to the charges that you pay. I’ve written an article called ‘What are the different share classes in funds?‘ and why this matters. Part of this change may include saying that ‘trail commission’ which was outlawed for new investments in January 2013, should end at a set point in the future. Trail commission is part of the commission that was paid to a financial adviser. Before 2013, they could get some upfront commission and ongoing commission.
  • Push the industry to introduce a single all-in-one fee. An EU regulation (called MiFID II) will mean that if you’re investing in funds through an adviser, you’ll get a lot more information about charges. The FCA wants this to apply to all investment funds.

SAVVY TIP: The FCA also says that will take a further look at investment platforms. These platforms let you hold a number of investments together.

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