High charges in actively managed funds are not justified by higher returns on average, the FCA has found.
“Weak price competition” and a failure to report performance against an appropriate benchmark were just two of the shortcomings the regulator has found in the asset management market.
Releasing the interim findings of a study into the sector it began in November last year, the FCA says that though passive funds saw stronger price competition, there were still some examples of poor value in passives too, while fund objectives were not always clear across the sector.
The FCA finds that: “Despite a large number of firms operating in the market the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering.”
The regulator has put forward a number of reforms for the market, including an “all-in fee,” greater clarity on fund charge communication and the identification of underperformance and getting retail investors to switch into better value share classes easier.
FCA chief executive Andrew Bailey says: “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. We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests. The remedies that we are proposing today aim to achieve these outcomes.”
The role of investment consultants and IFAs
Investment consultants, the FCA adds, do not effectively find outperforming fund managers. More significantly, the regulator noted “conflicts of interest in the investment consulting business model which require further scrutiny.”
One of these, the regulator notes, is when investment consultants offer products that were previously provided by asset managers, such as fiduciary management and funds of funds, in a vertically integrated model and may recommend these over better value investments outside their range.
The FCA says: “We found that most investors are aware of the risks arising from conflicts of interests and misaligned incentives and in some cases a few had taken steps to mitigate the risk that their consultants’ interests may not be aligned with their own. However, this alone may not be sufficient to mitigate the risks that arise or to ensure that investors get good outcomes.”
As a result, the regulator will consult on whether a further investigation by the Competition and Markets Authority on the investment consultancy market is required.
The FCA has also asked the Treasury to give the regulator responsibility for the provision of institutional investment advice.
Further follow up work will include looking at how competition impacts on the retail distribution of funds, “particularly in relation to the impact financial advisers and platforms have on value for money.”
The regulator’s final report is due in the second quarter of next year.
The review has cost the regulator at least £1m so far, according to a Freedom of Information Act request by Fund Strategy sister publication Money Marketing. The regulator described the study as a “key piece of work” for the FCA.
Absolute return funds
The interim findings also confirms reports that surfaced in August that the FCA wanted to include absolute return funds in the study.
The FCA outlined some of its concerns in the interim report: “Many absolute return funds do not report their performance against the relevant returns target. For example, an absolute return fund may be failing to achieve its performance objective of beating a cash benchmark by 2%. But these funds show their performance against a cash benchmark only, giving the impression that they have outperformed.
“Second, we have concerns about absolute return funds that charge a performance fee when returns are lower than the performance objective the fund is aiming to achieve. The manager is rewarded despite not achieving what the investor considers to be target performance.”