Takeaways from the FCA Asset Management Market Study

5 July 2017  |  Adam French
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The long-awaited Asset Management Market Study was published by the FCA last week.
The changes were broadly in line with expectations and suggested changes to pricing, clarity of objectives and competition. We think that the report is well balanced but there is still work to be done.

This week the FCA published their final findings from their Asset Management Market Study. Generally, the study has been well received by both the industry and their clients and the recommendations were in line with expectations. The report furthers the move to greater transparency in the industry and puts the consumer at the heart of every proposal, but there is still a long way to go.

Profits Are Steadily Increasing

Average operating profit margin

Average operating profit margin

FCA analysis based on financial data submitted to the FCA from 16 firms

The Operational Margin Is Considerably Higher for Active Funds

Average fund charges for one year for a £20,000 FTSE all share equity investment

verage fund charges for one year for a £20,000 FTSE all share equity investment

FCA analysis based on financial data submitted to the FCA from 16 firms

The high level of profitability does not reflect the current client experience. The report shows that returns and fees often have an inverse relationship, yet the profitability of asset managers continues to grow – it strikes me that the consumer isn’t yet seeing the very best of the asset management industry.

Key Findings

Price competition

  • Price competition was found to be weak in a number of areas.
  • There is considerable price clustering and charges have broadly remained stable over the past 10 years.
  • Profitability is high with average profit margins at 36 percent.
  • Prices are not lowered to win new business which indicates that price competition is not working effectively.

Performance

  • There is no clear relationship between charges and the gross performance of retail active funds. There is actually some evidence of a negative relationship between returns and charges.
  • It is accepted that past performance is not a guide to future performance but where performance persistence has been identified, it is persistently poor performance. Investors should bear that in mind as they often look at past performance as an indication of future performance.
  • Poor performing funds tend to be closed or merged into better performing funds and on average, post merge, the performance of the better fund starts to decline. It can also take a long time for worse performing funds to be closed or merged.

There is no clear relationship between charges and the gross performance of retail active funds. There is actually some evidence of a negative relationship between returns and charges.

Clarity of objectives and charges

  • Many active funds pursue a similar strategy to passive funds (closely replicating the performance of an index), but charge significantly more to do so. There is around £109 billion in ‘pseudo-active’ funds which closely mirror the market and are more expensive than passive funds.
  • There are a significant number of investors who are not aware that they are paying charges for their asset management services.

Too Many Active Funds Have a High OCF and a Low Tracking Error

Tracking Error Against OCF for Clean Equity Share Classes over 2013-15

Tracking Error Against OCF for Clean Equity Share Classes over 2013-15

Returns and benchmark data provided by Morningstar Direct. OCF data provided from a sample of asset managers, enriched with information on charges from Morningstar Direct. Past performance or future projections are not indicative of future performance.

Key Proposals

Protection for investors who are not well placed to find better value for money

  • Strengthen the duty on fund managers to act in the best interests of investors by clarifying expectations, increasing accountability and introducing a minimum level of independence in governance structures.
  • A minimum of two independent directors on funds managers’ boards.
  • Make it easier for investors to switch to cheaper share classes.

51% of Consumers Are Not Aware of Charges

Do you pay fund charges on your most recent investment product?

Do you pay fund charges on your most recent investment product?

NMG Consumer Research (2016)

Remedy to drive up competition

  • Disclosure of a single all-in fee and a standardised template to disclose charges. As we discussed in our blog post, The Labyrinth of Fees, current fee structures tend to be opaque and clients often don’t quite know where they stand. A single all-in fee really would be revolutionary for the asset management industry.
  • A working group to make objectives clearer and more useful for investors.
  • Continue work to remove barriers to pension scheme consolidation.

Improving the effectiveness of intermediaries

  • Recommend that the Treasury considers bringing investment consultants into the regulatory perimeter.
  • Launch of market study of investment platforms to look at competition.

What Do We Think?

The Final Report has been diluted since the Interim Report was announced in November last year, but the proposed changes will still deliver huge benefits to the consumer. I think that the FCA has really listened to the industry and the consumer and suggested changes based on sincere feedback; this is great to see.

The best interests of the customers are at the centre of every proposal and although the changes will take time to implement, ultimately, they will give the consumer a much more transparent view of the asset management industry. At Scalable Capital we will continue to push for a more transparent industry. We believe that all financial services clients deserve better and we will continue to offer the simplicity and transparency that the industry should aspire to.

Anyone that wants to read the full report can do so by clicking here.

Image: Bethany Legg/Unsplash.com

Risk Warning – With investment comes risk. The value of your investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance. We do not provide any investment, legal and/or tax advice. If this website contains information regarding capital markets, financial instruments and/or other topics relevant for investments of assets, the exclusive purpose of this information is to give general guidance on investment management services provided by members of our group. Please note our Risk Warning and the Website Terms.

 

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Adam French
CO-FOUNDER & DIRECTOR
Adam spent the last 8 years working in London in the financial services industry. As Executive Director of Commodities Trading at Goldman Sachs, he was responsible for the Commodities Structured Products franchise. Prior to this, he worked in Derivatives Trading where he was responsible for electronic trading for private clients in fixed income, currencies and commodities products. Adam studied Business Mathematics and Statistics at the London School of Economics.