In this weekend’s FT, Merryn Somerset-Webb asks us to imagine ourselves a Government strapped for cash to meet rising costs of social care and struggling to find a source of revenues.
.. late last year Britain’s Financial Conduct Authority established that the average profit margin of UK based asset management companies is 36 per cent against an All-Share average of a mere 16 per cent — you have no taxation-related way to get at it.
The article stops short of calling for the dementia tax to be levied on asset managers, but suggests that cost transparency could in time lead to a redistribution of wealth from the City to Care, via the savings pots of Britain’s savers.
It is vision that will find favour with those in the Transparency Task Force but it is a vision not a policy, there are – as Merryn’s article points out, various caps already in place but there is no rule that says that savers cannot invest in high charging fund management schemes, nor will there be. It is simply unenforceable.
There are alternatives; the Government can – and in my view should, promote a simple value for money measure to show the chances of a high and low cost manager achieving and out-achieving. The trick is to use data wisely.
We need data
Data is out there and it can show comparative performance accurately; there is however no trusted source for that data to cover all the options a consumer has. For instance, there is no way of properly comparing the performance of NEST, People’s Pension and NOW against the performance of L&G, Standard Life and Aviva. The Data isn’t marshalled!
Data is out there and it can show the risk taken to achieve results. comparative performance data can be organised on a risk-adjusted basis to show the value that you are paying for- though no such mechanism currently exists.
Data is also out there to show the true cost of fund management, the money lost through “slippage” and direct fees that cannot be recovered by the consumer because it is in the hands of the fund management “industry”.
Data that is organised
If the data is out there – can we find a way of organising it? I think the answer is “yes”, though whoever does that organisation will need a leg-up from the regulators- the market cannot be expected to organise itself and the Government cannot hope philanthropy to achieve such a mammoth undertaking. There has to be intervention, if not in further capping, than in ensuring there is proper benchmarking with results open to all.
The benchmarking of rivals, whether sports teams, or financial services providers is a brutal way of showing who is cutting the mustard. Football managers are sacked for comparative under-performance but fund managers are able to prosper even when they are shown to be performing battle.
Last week, some big-wig at F&C kicked up a stink when Morningstar downgraded his fund for having high charges (the multi-asset funds do). He argued that he should be judged on a more sophisticated measure (perhaps he is). The problem is that consumers have no access to the conversation – it happens in the private pages of financial journals.
And when Vanguard very publicly launch a service which brings the cost of fund management down by between two and three times, this important information is also buried.
The truth is that fund managers and pension providers fear benchmarking almost as much as they fear price-capping. Both leave bad practice exposed, price-capping is simply an extension of the competitive pressure created by benchmarking.
Data that is available
But back to Merryn’s argument.
If we are to have a price-capped funds business then we will have imposed a control of a beast for a while, but the beast will break out of its pen – using its creativity to defeat the regulators , rather than benefit consumers.
If we go the benchmarking route, we need to have popular awareness of what good looks like and general enthusiasm for getting value for money from the financial services purchased. We have to recognise that most of us will not have the interest or the capacity to choose for ourselves, we will need advisers, trustees, consultants and IGCs to do this for us. And they will need the data organised in a proper way with the help of Government.
The distribution of digestible data is critical to the transfer of value.
The means of getting information to the people who take decisions is changing. The Government is making it possible for people to see information about their investments through pension dashboards, I am seeing interest among those who organise payroll data (the software suppliers) in providing information on the workplace pensions they help manage to employers and their advisers.
The chances are that by the end of the decade we will have access to the kind of performance data that will expose the weak managers and promote the strong.
I think that this is the way forward – and I suspect that Merryn agrees. Price caps are there for breaking, but if we have savvy consumers we have a mechanism to keep a lid on back practice that cannot be broken.
I hope that with the help of others, we can provide a lasting means of transferring the value that sits with the City to the care we must pay for in the coming decades.
Merryn Somerset Webb’s article; Cap asset management fees to free up cash for social care