Are investors and pension savers being ripped off? That question is the clear subtext of the FCA’s new report, which marks a milestone in its ongoing study of the asset management market. As a shake-up of the industry, the FCA’s study promises to be as significant for investment management as the RDR and FAMR have been for the advice industry – which itself will be paying close attention to the outcome of this one. Despite the interim nature of the report, it is easy to see which way the wind is blowing.
The key findings to date strike a highly critical tone. In summary, the FCA’s main points are these:
The overall theme is clear – and it’s that investment management is currently far from clear. The FCA has zeroed in on what it perceives as a lack of transparency. It is hard for investors to tell whether the fees they are paying are justified, and without proper benchmarks many are apparently having to take this on trust. Taken together with the industry’s high profits and the clustering of prices, the insinuation that hangs over the report is that investors are being exploited.
Given that the term ‘investors’ include not just high-net-worth individuals playing the stock markets, but every individual with a pension fund, the report’s potential impact is far-reaching. Financial advisers, in particular, need to be confident that the funds they recommend are truly as suitable as they appear to be, or they themselves risk accusations of mis-selling. The report acknowledges that transparency is of limited value to the average private investor, who tends to place an over-reliance on past performance, but it would certainly make the adviser’s task more straightforward as well as less risky.
The FCA has proposed a number of potential steps that could be taken to improve outcomes for investors:
The FCA’s chief executive, Andrew Bailey, said, ‘In today's world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs. To achieve this, we need to ensure that competition in asset management works effectively.’ Though he ruled out a price cap, arguing that this would hamper competition, he went on to say, ‘We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns.’
The scathing criticism of actively-managed funds, and their unfavourable comparison with passive funds, may prompt many private and institutional investors to review their investment strategies. The report’s claim that the fees incurred by actively-managed funds are ‘not justified by higher returns’ may prompt a major shake-up in how individuals and pension funds choose to invest. In particular, the FCA’s finding that a market-tracking passive fund could outperform an active one by 44 per cent over 20 years, due to lower charges, is damning.
The FCA’s proposed solution of greater transparency is one that advisers and their clients should welcome – and the industry should too. Most investors would willingly pay higher fees if they could clearly see a greater benefit resulting from active management – the problem is that, at present, this is hard to do. If the asset management sector is to remain competitive, it must start proving its worth, which means demonstrating exactly how higher fees are translating in to better results. This, in turn, will enable advisers to recommend their platforms with more confidence, and reduce the risk of mis-selling accusations further down the line.
You can read the full FCA interim report here: https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf