There is little competition on price within the fund management industry where high charges are not usually justified by high returns, according to the Financial Conduct Authority.
The financial regulator’s market study was launched in November last year with a view to establishing whether consumers are getting good value for money when they buy investment funds.
UK asset managers currently run £7 trillion of assets, making it the second largest asset management industry in the world, the FCA claims.
In its research so far, the FCA has found:
- Limited price competition for actively managed funds, where higher charges, are on average, not justified by higher returns.
- More pricing competition amongst passively managed funds (known as index-trackers), although the FCA did still find some over evidence of over-charging.
- Fund objectives may not always be clear and performance not necessarily displayed alongside an appropriate benchmark.
As a result of these findings the regulator is making a number of proposals:
- New measures to force asset managers to account for how they deliver value for money
- Introducing an ‘all-in-fee’ to enable investors to see what charges are being deducted from the fund
- Improving fund details so investors are better able to see its objectives, strengthening the use of benchmarks and providing tools to help highlight persistent underperformance
- Requiring clearer communication of charges and their impact at point of sale.
"Report is FCA's finest piece of work"
Justin Modray, director at Candid Financial Advice says: “This report is probably the FCA’s finest ever piece of work. In short, its findings confirm what we’ve known for years: fund managers don’t compete on price, fail to pass on economies of scale, enjoy sky high profit margins, often underperform benchmarks and still fail to clearly disclose and explain charges.
"And the FCA also voicing concern over the impact of platforms and financial advisers on value for money is the icing on the cake.”
Candid Financial Advice says that M&G Optimal Income fund "perfectly highlights all that is wrong with fund manager charging". The latest published accounts show the £18 billion fund charged investors £253 million in annual management fees over the year to September 2015. And M&G also snuck in an extra £34 million of ‘administration’ fees, along with small print that says it can keep the surplus if it took too much. Performance has also been poor with the fund ranked 44th out of 75 funds in its sector over the past 3 years.
“More money is moving into passive funds”
Commenting on the FCA findings, Patrick Connolly, chartered financial planner at IFA, Chase De Vere says: “This report highlights a number of issues that are already well known in the industry. Many actively managed funds charge too much and deliver too little, yet a lack of transparency hides the full extent of charges and inappropriate or unclear benchmarks can hide poor performance.
“It is entirely understandable that we’re seeing more money moving into passive funds and this is a trend that is likely to continue. To fight back the industry needs to lower their charges, provide greater transparency and produce more consistent and better performance; there is no reason why they cannot address the issues of charges and transparency now.”
The fund management industry's response
Chris Cummings, chief executive officer, at the Investment Association, which represents the fund management industry, says: "The investment management industry is committed to serving the needs of the UK's savers and investors and so we support the FCA's objectives to ensure that competition in the industry works to the benefit of its customers, whether individuals, families or institutions. Over the coming weeks, we will engage closely with the FCA to understand its findings and the full implications of potential remedies.
"We are pleased that the FCA has recognised the industry is already leading on improving cost transparency for our clients by developing a new Disclosure Code, and the investment industry notes and welcomes the regulator's strong backing for the project. We look forward to working more closely with the regulator to deliver this important goal."