The Financial Conduct Authority (FCA) has published a damning report into the current state of asset management, in what has been described by one manager as a “defining moment” for the industry.
On Friday the FCA published the interim findings of its market study into asset management, first launched in November 2015 to assess whether competition is working effectively and institutional and retail investors get good value for money when purchasing asset management services.The study found several flaws in the operating model, including weak price competition in a number of areas of the industry; the price of passive funds has fallen while active prices have remained stable; and despite a large number of firms operating in the market, the asset management industry has seen sustained high profits over a number of years – an average of 36% versus 16% for FTSE All Share companies.It highlighted that investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark.It also proposed a significant package of remedies that seek to make competition work better in this market, and protect those least able to engage actively with their asset manager.These include a strengthened duty on asset managers to act in the best interests of investors, including reforms to hold asset managers to account for how they deliver value for money, and introducing an all-in fee so that investors can easily see what is being taken from the fund.In terms of institutional investment, the FCA proposed requiring increased transparency and standardisation of costs and charges information and exploring the potential benefits of greater pooling of pension scheme assets.FCA chief executive Andrew Bailey said: “In today’s world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs. To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment.“We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns. We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests. The remedies that we are proposing today aim to achieve these outcomes.”A defining momentCohen & Steers co-founder and CEO, Robert Steers, said the review marked a “defining moment” for the asset management industry.He said: “At some point, every industry faces a defining moment – a reckoning that fundamentally alters the market landscape. It is a way of purging stale business models to make room for the next generation. Those who anticipate and position themselves for the sea change have a chance to survive and even thrive. Those who do not are relegated to the dustbin of history alongside Eastman Kodak and Blockbuster.“It is time to acknowledge the truth. Long-only active asset management in its current form is no longer a growth industry.”Time for managers to step-upSYZ Asset Management head of European equities Mike Clements said the FCA probe offers “positive change” and paved the way for active asset managers to refocus on delivering client solutions and generating outperformance.He said: “Active fund management houses need to refocus on delivering client solutions and generating outperformance, whether it is via differentiated strategies or research-led investment. Margin pressure is inevitable, and management teams need to ensure they have suitable products for the current investment environment and at the right price.”Clements added the reality is that we are living in unprecedented times and it is during exactly these types of situations where active managers can demonstrate value by navigating investors through choppy waters while exploiting opportunities.“This means taking a truly long-term view, employing a contrarian approach and investing in good quality assets at attractive valuations,” he added. “Price is important, but ultimately it is about delivering the right outcomes for investors.”All-in fee welcomedSpeaking about the proposals to introduce an all-in fee for funds, Investment Association (IA) chief executive Chris Cummings said: “The IA and the FCA have long been united in their support for use of the ongoing charges figure, rather than annual management charge, to provide a complete and comparable expression of investment fund charges to customers. This is available in the Key Investor Information Document, but will be removed in the PRIIP Key Information Document, a development that is wholly retrograde for good communication to customers.“[The] proposal to introduce a single charge across the industry renews the debate and we will work closely with the FCA as it examines how its options might improve the information set delivered to customers.”CFA Society of the UK chief executive Will Goodhart said: “Fees and charges matter. They have a material impact on investor returns. We have always been clear that investors should be able to see the costs that relate to the management or administration of their assets. These should be comprehensively disclosed. The difficult question that has arisen is whether to show an estimate of trading costs ex ante or the actual figure ex post – and who should bear those costs.”“It is time to acknowledge the truth. Long-only active asset management in its current form is no longer a growth industry.”
Robert Steers, Cohen & Steers
