The financial watchdog’s director of strategy last night branded competition within the asset management industry “a market failure” and criticised the role of intermediaries, commenting on the UK regulator’s interim report into its workings.
Speaking at the Tax Incentivised Savings Association’s (TISA) annual conference, Chris Woolard of the Financial Conduct Authority (FCA), said that the regulator was ready “for the first time” to use powers to make a market investigation reference under the Enterprise Act to the Competition and Markets Authority.
Last week, as reported, the FCA put forward its plans for a shake-up of the £7 trillion asset management industry in a bid to give investors better value for money, including introducing an “all-in” fee approach so investors can see where their money is going, and note what is being taken from the fund.
Woolard said the report was “probably the most significant piece of competition work” the FCA had undertaken and flagged that investment consultants, were on average, not able to identify managers who offer better returns to investors.
He also voiced concerns over whether the interests of investment consultants are in line with investors’ interests and warned that the report was indicative of “a market failure in the economic sense”.
While the FCA expects the industry to engage with the analysis and make positive changes, it is clear that the report will have a profound affect on the already beleaugured set management industry.
“Asset managers are entrusted with a very clear social responsibility to the nations’ savers – our job as the regulator is to make sure that it is an efficient and effective market that serves the interests of these savers,” Woolard told the TISA conference.
“As well as looking at how asset managers compete – we looked at the relationship between price and performance. What we found was that there was no clear relationship between the two – in essence the most expensive funds do not appear to perform better than other funds before or after costs.
Among the most heavily criticised areas in the report Woolard said was the fact that around £109bn is invested in expensive ‘active’ funds which closely mirror the performance of the benchmark.
“What we are talking about is a significant number of funds who take only modest positions yet charge a high price for them,” he said. “These funds are advertised as ‘active’ funds, but in effect perform quite closely like passive funds – delivering similar results.
“We are also not advocating one type of investment strategy over another. This is not a case of active vs passive. But what we are saying is that investors should get what they pay for – or to put it another way, they shouldn’t overpay for what they receive.
Investment consultancy criticisms
On the role of wealth managers and institutional advisers, Woolard said that while there are a number of large, sophisticated institutional investors who are able to negotiate good deals with their asset managers, there is a “long tail of smaller institutional investors” – mainly 32,000 small pension schemes – who behave much more like retail investors and achieve similar outcomes are of particular concern.
“These smaller fund trustees are particularly dependant on the advice they receive from investment consultants,” he said. “We have identified a number of concerns about the way in which the investment consultancy market is operating. Our evidence suggests that investment consultants, on average, are not able to identify managers who offer better returns to investors.
“It it is difficult for pension funds to assess whether the advice provided by investment consultants adds any value. We also have concerns about whether the interests of investment consultants are in line with investors’ interests,” he added.
Woolard reiterated the FCA’s stance that past performance is “inconsistently presented”, making it difficult to interpret and therefore compare funds. He said that although the warnings have been part of the FCA’s handbook and advertisements for years, the study shows past performance really has “limited value as an indicator of future performance”.
“Coupled with a focus on past performance was a general lack of focus – especially among retail investors – on what they are actually paying for the service that they receive – around 50% of retail investors were not aware or were unsure whether they were paying fund charges,” said Woolard. “Many asset managers told us they did not lower prices to compete. Clearly this is troubling, especially as the impact of charges and getting what you pay for is particularly crucial in this market.
“As these are long-term products, even a small reduction in charges can have a material impact on the amount of money consumers will have in their savings and pension pots,” he added.
Click here to view the full transcript of Woolard’s speech.