The asset management market study by the FCA published last month shone a welcome light on the murky, highly profitable world of fund management. Lack of competition, high margins, opaque charging structures and consistent under-performance were just some of the highlights.
Intriguingly, the FCA also intends to carry out similar reviews into the investment platform and financial adviser market.
The scope of these reviews is unclear but there’s no doubt the FCA strongly believes that it is not just the asset management industry that is failing to work properly in delivering good outcomes and, in particular, value for money for customers.
It is not difficult to see why they would reach this conclusion. The table below shows how a typical client of a financial adviser could be charged on their investments.
What they show is just how many mouths are being fed in the whole arrangement. Each mouth with its own profit margins to achieve – and all of them feasting on the same pot of customers’ money.These are average charges. They will vary between advisers and the type of investment strategy that you take. The above is based on an active investment strategy.
The question as to how much value each party delivers is a very interesting one and if that question is asked of each party they will explain how they are the most important. Ask them who should be dropping their fees so that the client pays less overall and they will say that price it not the most important factor to consider and that value is subjective.
They are right in that value is subjective but fees in excess of 1% per annum are just not acceptable anymore. Notwithstanding the climate of low returns we are entering into and the huge impact charges have on returns, the actual costs that clients pay haven’t changed in decades.
This is despite the much-lauded introduction of technology that is meant to make customers experience better but also makes the efficiencies of the providers greater, while the only thing changing are the increasing profit margins.
Vanguard is a lone voice in highlighting how economies of scale can be used to benefit the consumer rather than shareholders and fund managers’ bonus pots. It readily admits that as the business grows its customers will pay less and this is evidenced in the gradual lowering of fees as the total assets under management grow.
This perhaps explains why in 2016, Vanguard received more new money than the rest of the global asset management industry combined. Putting the customer first is an obvious but often overlooked strategy.
One of the recommendations that came out of the FCA paper was to introduce a new all-in-one fee that would tell the customer exactly how much they would be paying in costs for their investment. Whilst this is a good move and addresses the ridiculous current position where this doesn’t have to be disclosed, it will only have the desired effect if companies disclose it clearly and openly on their websites or documentation.
The FCA found through customer research that 51% of investors didn’t think they actually paid any fees and that another 22% weren’t sure. This is a pretty damning indictment of the importance, or lack of, placed on customer engagement and transparency by the financial services industry.
Whether you are an existing investor or are looking to invest for the first time, it is essential that you ask the key question: what you are paying in charges?
If the answer is ‘as little as possible’, you’ll go a long way to avoid an unhappy and stressful outcome with your hard-earned savings.
Anthony Morrow is CEO of evestor.co.uk