Mark De Ste Croix MCSI, head of compliance & legal at Raymond James Investment Services, looks at the impact of the recent FCA study for asset managers, private wealth managers and platforms
The final findings of this major FCA study were published in June, and while there may not be any single earth-shattering fact or outcome, the impact of the proposed remedies on asset managers, private wealth managers and platforms is likely to be felt for years to come. The FCA has commented on various broad categories of findings, being ‘price competition’, ‘performance’, ‘clarity of objectives and charges’, and ‘investment consulting and other intermediaries’.
Price competitionThe FCA has found price competition to be weak in certain areas, with a key aspect being that prices tend to fall as the size of a mandate increases, as might be expected, but this seems to be limited to institutional investors, with the same mechanism not available for similarly sized retail funds. It also notes considerable price clustering on the management charge for retail funds – while acknowledging this does not necessarily mean a lack of competitive pricing, it has found high levels of profitability with little evidence of prices being lowered to win business, suggesting a lack of effective competition.
PerformanceLooking at fund performance and the relationship between price and performance, the evidence gathered suggests that on average, active and passive funds do not outperform their benchmarks after fees, and this is true for both retail and institutional investors. Further, analysis suggests that there is no clear relationship between charges and gross performance of retail active funds, but some evidence of a negative correlation between net returns and charges. This indicates that when choosing between active funds, investors paying higher prices achieve, on average, worse performance.
Clarity of objectives and chargesThe FCA has found that many active funds offer similar exposure to passive funds but some charge significantly more, which probably won’t come as a surprise to most wealth managers. It estimates there is around £109bn in supposedly active funds that closely mirror the market. Interestingly, it considers value for money in asset management products to be a form of risk-adjusted net return, broken down into the performance achieved, the risk taken to achieve it, and the price paid for the investment management services. It finds that many institutional investors and some retail investors are increasingly focused on charges.
Investment consulting and other intermediariesThe FCA has identified concerns in the investment consulting market, and on 14 September 2017 confirmed its final decision to make a market investigation reference to the Competition and Markets Authority in relation to investment consultancy and fiduciary management services. Closer to home, it recognised the role of asset managers in the chain that delivers investment products to consumers, but suggested that retail investors do not appear to benefit from economies of scale when pooling their money together through direct-to-consumer platforms. As a final passing shot it stated: “We also have concerns about the value retail intermediaries provide.”
What changes will we see?The result of all this is a proposed ‘package’ of remedies designed to “bring together a consistent and coherent framework of interventions”. What this specifically means in practice will become apparent over time, but there are plenty of clues: strengthening the duty on asset managers to act in the best interests of investors through governance structures; looking at risk-free box profits, a possible sunset clause for trail commissions and a standardised disclosure of costs and charges; and a follow on market study into investment platforms to look at how competition is working in that market. Early indications are that this is the next phase of following the distribution chain, and given the significant role intermediaries play in the use of platforms, it seems likely that the microscope will also focus on wealth managers.
Views expressed in this article are those of the author alone and do not necessarily represent the views of the CISI.