In its final report (pdf over 100 pages) into the UK's financial asset managers, the FCA has raised a number of concerns about the way the industry is failing investors.
Here are a few aspects from the report which may be of interest.
1 The asset management industry plays a vital role in the UK’s economy. Asset managers manage the savings and pensions of millions of people, making decisions for them that will affect their financial wellbeing. The UK’s asset management industry is the second largest in the world, managing around £6.9 trillion of assets. Over £1 trillion is managed for UK retail (individual) investors.
2 The services offered to investors involve searching for return, risk management and administration. The investor bears virtually all the investment risk. There are around 11 million savers with investment products such as stocks and shares ISAs. These investors are willing to put their money at risk to generate potentially greater returns than they can get through cash savings.
3 We find weak price competition in a number of areas of the asset management industry. We confirm our interim finding that there is considerable price clustering on the asset management charge for retail funds, and active charges have remained broadly stable over the last 10 years. We found high levels of profitability, with average profit margins of 36% for the firms we sampled.
4 We looked at fund performance, and the relationship between price and performance. Our evidence suggests that, on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. This finding applies for both retail and institutional investors.
5 We looked at whether some investors, when choosing between active funds may choose to invest in funds with higher charges in the expectation of achieving higher future returns. However, our additional analysis suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK. There is some evidence of a negative relationship between net returns and charges. This suggests that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance. Similar academic studies of the US mutual fund industry have typically found a negative relationship between fund charges and fund performance.
6 We find that it is difficult for investors to identify outperforming funds.
7 We estimate that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.
8 There are a significant number of retail investors who are not aware they are paying charges for their asset management services.
9 Our analysis suggests that retail investors do not appear to benefit from economies of scale when pooling their money together through direct – to – consumer platforms.
Having identified some of the problems, investors should not expect any significant changes anytime soon. The FCA are now setting up working groups and further consultations and hope to report back some time later this year.
They have to consider what impact any changes will have on the attractiveness of the UK as a place to continue
ripping off small
investors doing business.
I will continue with my low cost index funds and investment trust and my low cost platforms. I would not rely too heavily on the ability of the FCA to give the best deal to the consumer but then I am a cynic!
The best way to keep fund manager on their toes is via competition from the likes of Vanguard as more and more ordinary investors switch from the expensive underperforming actively managed funds into low cost index funds. The FCA can tinker around the edges but I believe the industry will always find ways around whatever changes are brought in.
Leave a comment below if you have any views on this report.