Norma Cohen

The great British financial journalist Norma Cohen rarely publishes in the FT these days, when she does, it is to great effect. This week she published a quiet and thoughtful piece on the impact MIFID II is having on fund management and the advantages it will bring to consumers in terms of better returns springing from better managed costs.

You can read the article here (if you have an FT sub).  

Cohen focusses on the two principal measures MIFID II will impose on fund managers. The first is to unbundle the cost of research from the annual management charge so this overhead is born by the fund manager and not by the fund.

The second is the requirement on fund managers to get best execution from those carrying out the transactions booked by asset managers.

These might seem to be technical matters – of little interest to the consumer. This is precisely the problem. Consumers have little time to measure the value they are getting from those who manage their funds, and little technical capacity even if they have the time. If we believe fund managers are fiduciaries, we would expect them to carry out the management of our money according to best practice. But all the evidence shows that this has not been the case.

We therefore need super-fiduciaries to guard the guards. Next week sees the first meeting of the FCA’s new fee-disclosure committee. We don’t know much about what it will do or who will be on it , but with Dr Sier in charge, we can expect it to take a tough stance on the disclosures required by MIFID II so that consumers can have greater confidence they are getting good value for the money they are paying fund managers.

Cohen concluded her piece

” the drive to achieve the best price for the customer and to make it clear to customers exactly what they are paying for can only be a good thing for end investors. Better late than never”.

There is – in those last four words – a note of regret. I have been taught by Norma, as have hundreds of thousands of readers. Those who set up and have managed the Transparency Task Force owe her a debt. When to talk about the impact of bundling and poor execution was heresy, Norma and the FT talked about it. This despite the commercial consequences on advertising revenues and the charges of “wrecking” against our funds industry.

In the time that Norma has been campaigning, fund managers have continued to lose investors value through poor cost controls and bad execution. Now the 38% typical margin that the FCA has reported fund managers earn in the UK is now under pressure. That pressure comes not just from regulation, but from competition within the market.

Low cost managers that deliver market returns are now favoured against high cost managers claiming (but often failing) to outperform markets. Where managers have got their costs under control and can deliver outperformance (Terry Smith of Fundsmith for instance) there is still demand for active management, but managers like Smith are rare. Market leading active managers like Jupiter and Aberdeen have already moved towards the approach required by MIFID II, others (Vanguard, Legal and General) have been compliant for some time.

There appears to be commercial advantage for fund managers in becoming transparent, which – together with the regulatory imperative – means “a good thing for the end investor”.

But this has not been achieved just by competition and regulation. Norma Cohen is too modest to ever claim credit, but I think we should push her to the front and give her a round of applause.

She has not left her study for her PHD to write an article for fun, I am quite sure that Norma Cohen wrote that piece in FtFM – to remind the Investment Association that she is still watching! Those she has inspired are watching too!