Are fund managers the new bankers? If you’ve read the excellent (draft) FCA Asset Management Market Study, you’d be forgiven to think they were – (and that investment consultants were their knowing flunkies).
The question now is how far the FCA retreat in the face of industry lobbying, fears about BREXIT and domestic political uncertainty.
Thankfully, we have in the UK an independent press who can report dispassionately on the issues. A fine example appears in the FT this morning , courtesy of Chris Flood. Many readers won’t have access, I do and will draw on this article for a poor man’s version!
Here then are the FT’s 6 things to watch when the final report is published on Wednesday (28th July).
1. A single all-in fee to beef up transparency;
including trading (transaction) costs in the quoted fund charge would give consumers a clear idea of the cost of ownership. But it goes against what the Europeans are bringing in (MIFID II) and fund managers argue that it would focus minds on just a half of the value for money equation. The funds lobby has attempted to become the consumer’s champion, even going so far as to set up their own working group headed by NEST CIO Mark Fawcett, but has their credibility at the FCA finally run out?
2. Fund managers accused of price-rigging;
once you’ve got to a certain size as an asset manager, your business profits track the performance of markets you invest in . This is great for shareholders but means that asset management gets more expensive as markets rise.Arguments that fund managers are cutting prices are at variance to popular perception of asset manager behaviour (offices in City/sports sponsorship and bloated bonuses). The FCA say they have uncovered evidence that a fund management pricing cartel exists (supported by investment consultants). The managers argue that competition is alive and well as evidenced by the arrival of low cost management through the likes of Vanguard.
3.Value for money for retail investors;
the FCA claim that savings that consumer savings that should have passed through post the abolition of commissions have not been passed on to the consumers. This seems right and wrong, consumers are now paying more than ever for funds as they use more sophisticated fund platforms and get more sophisticated advice and even fund of fund management from their advisers. The asset managers argue that their prices are coming down and that consumers are prepared to pay for expensive platforms and fund advice is not their problem.
That the asset managers spend so much time and money getting their funds prominent places on platform buy-lists suggests that the days of commission aren’t quite over yet and that market bias’ persist. If you take that view, then the FCA are right to point to the asset management/platform love-in , as simply another way of skinning the consumer cat.
My reading may explain how the FT’s and Fund Industry’s views can both be correct. The Fund Industry may have dropped their prices to platforms but consumers are still paying the same. Platforms have become a means to return value to advisers, a commission replacement mechanism.
4. Fund governance crackdown
The FCA are convinced that the asset managers are not policing themselves. They appear to regard the Investment Association as a poacher not a gamekeeper and they’re keen to get some kind of arms length governance in place to curb the perceived excesses in reward to fund managers and their shareholders.
Whether they do this using something akin to the powerful US mutual boards, or the Senior Managers and Certification Regime, or something more like the insurance Independent Governance Committees was left open in the draft consultation.
In any event, the funds lobby would argue that they have quite enough governance and that the market should be left to look after itself. The alternative argument “Britain is a good place to do funds business, as we can do what we like” is not heard in governance debates, but is regularly trotted out to the Treasury by the Investment Association. The implication is clear, if we want the taxes, we’ve got to make Britain asset management friendly, so go easy on the governance!
5. Performance reporting
Anyone who has tried, knows how hard it is to get accurate data on what a fund manager is actually achieving for a client. The problem is the bundling up of directly and indirectly charged fees in one direction and the reporting of performance gross in another,
The funds industry does not like benchmarking (the practice of comparing performance of one manager against another). The FCA argue that by making reporting so complicated, benchmarking cannot happen. Infact benchmarking does happen but it is a minority sport. You have to pay investment consultants a shed load of money to get a clear view. The fact that we cannot compare performance of fund managers in most markets (including workplace pensions) is, the FCA suggests, part of the reason fund managers have been getting away with it for so long.
6. Are the investment consultants doing their job right?
The FCA reckon the investment consultants used by large pension funds and other institutional investors aren’t holding fund manager’s feet to the fire. Indeed they argue that there may be collusion between the two resulting in higher prices and lower transparency for customers.
For the reasons that I’ve already pointed out, the investment consultants appear to have been at best “asleep at the wheel” and at worst, “in on it”. With so much money floating about, investment consultants have understandably wanted to get stuck in and now look more and more like fund managers, if not asset managers.
The move among retail consultants into Discretionary Fund Management (DFM) is paralleled by institutional consultants into Fiduciary Management (FM). The “integrated” model, where consultants take their fees with relation to funds under advice muddies the waters – claim the FCA.
Investment consultants point to the fact that they are stymied in implementing their consulting/advice by poor decision making by their customers (trustees etc.). Moving to an integrated model gives them the power to take decisions over other people’s money in a timely and sensible way. The FCA is troubled by this attitude presumably questioning where all the complication arose!
Two sides for every story?
There are two sides to every story. The funds industry sees itself as a value creator and the FCA doesn’t. I guess there were two sides in the Garden of Eden too.
Whether the FCA acts is a test of their conviction, I have seen no evidence to suggest that their original view (the draft report) was materially wrong. Where the Investment Association and others can argue is that “now is not the time”. This has been the underlying argument for the past thirty years and the FCA may consider it’s wearing a bit thin.
If the FCA do introduce change, there are organisations like mine poised to move in and make change happen. So I’ll be watching for the report with bated breath from the poop of Lady Lucy on the first day of Henley (28th June) !
I hope that we will have change, Thomas Philippon argues that we’ve had no fundamental shift in the value equation of Vfm in the past 140 years. Could this be part of that change and can consumers be looking for more value for paying less money going forwards?
I’m grateful to the FT for helping me organise my thoughts and for their versions of the charts above. Once again, their take on these topics can be found here