Regulation set for a shake-up

Mark Polson asks whether the regulator can improve the value for money you get from your fund investments

 Regulation set for a shake-up

Mark Polson asks whether the regulator can improve the value for money you get from your fund investments‘These cats are seriously fat – all is not well when it comes to price competition’

From the volume of paper currently emanating from Financial Conduct Authority (FCA) HQ, it seems that regulators are as keen as I am to chuck projects at others before running at speed towards their holiday gîte in France and a large glass of Bordeaux.

One of their lobs has been towards the asset management industry. The benignly titled ‘Asset Management Market Study: Final Report’ (AMMS), published on 30 June, follows up on an interim report from the back-end of last year.

I remember describing that as ‘one of the most excoriating reports I’ve seen in 20 years in this industry’. And the final report reinforces its damning findings on the workings of the UK’s £6.9 trillion asset management industry, depended on by 20 million plus of us to manage our pensions and other long-term savings.

Litany of complaints

The case for the prosecution m’lud:

  • Average operating margins in the industry were an eye-watering 36 per cent to the end of 2015. These cats are seriously fat. All is not well when it comes to price competition.
  • £6 billion is invested in funds that track an index and charge way too much for this level of service. Step up Virgin Money’s UK Index Trust, which charges 1 per cent for tracking the FTSE All-Share Index. You can find equivalents for 0.06 to 0.08 per cent.
  • A further £109 billion is in ‘closet trackers’ – funds where you pay for active management but which in practice closely mirror the market against which they are benchmarked.
  • On average, funds do not outperform their benchmark after fees. And there’s no clear evidence that paying a premium for active management leads to higher returns. There’s some evidence it may have a negative impact.

All of this is compounded by poor communication from asset managers and the fact that around half of investors surveyed by the FCA either didn’t think they paid charges to asset managers or were unsure.

Alongside AMMS, the FCA published the first of what will be several consultations over the next year or so designed to try and fix things. Proposals range from strengthening the duty on asset managers to act in the best interests of investors and making them bring in independent directors to keep an eye on this, to making them pay some profits they are currently able to take risk free for their own benefit back into the funds they manage.

All of this is designed to up the ante on the fat cats to give themselves a long, hard look in the treating-customers-fairly mirror and start shedding some of that 36 per cent margin.

Why? Because the FCA wants ‘to ensure that the market works well and the investment products consumers use offer value for money. Improvements in value for money could have a significant impact on pension and savings pots.’

This brings us to the nub of it for you. Are you satisfied that the managers of any funds you invest in are offering value for money? Thanks to the magic of compounding, quite small differences in charges and relative performance can make a big difference to your pension and savings pots over the longer term. So, while you’re relaxing by the pool, here are some checks to run:

  • How much are you paying the asset manager for each of the funds you hold?
  • How does that compare to others with a similar mandate?
  • If you’re paying a premium for active management, make sure that’s what you’re getting. Classic signs you might be in a ‘closet tracker’ include holdings that broadly mirror the composition of the benchmark and performance that hasn’t significantly deviated.
  • Is your manager outperforming their benchmark after charges? Always look at past performance figures net of charges. If you’re investing through an online platform and/or a tax wrapper, check the charges for those too. They also affect your net return.

Now, this is meant to be a column about investing through platforms, and I’ve spent most of it having a go at fund managers. I don’t feel too bad about that – they’re big enough to take it, and in lots of cases these days the platform has a relationship with an in-house fund manager, and so has skin in the game anyway. However, I will say that I do think it’s reasonable for you to expect your platform to make it easy to see how much you’re paying and for what.

The new breed of robo-advisers are generally pretty good at this, but in too many cases if you want to know what you’ve paid for holding your assets – let alone for the assets themselves – you need to be adept at reading 36-page unit statements.

That won’t wash for much longer, and I think platforms will need to step up voluntarily before being made to do so by the FCA’s forthcoming Platform Market Study. It’s their turn next.


Mark Polson is the founder of price comparison website The Lang Cat

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