Wednesday, 28 June 2017

FCA Look Into Asset Managers

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.

8 comments:

  1. I believe there is a case for teaching all children that our financial services (banks, pension providers, insurance companies, fund managers and asset managers) are ALL living off YOUR money.
    They are not your friend, they are not doing you any favours. Just as Tesco or Asda is not your friend.

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    1. I am all for educating children about finances from an early age.

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  2. Any which way you look at it, the Investment asset management industry makes a really good living from us all! The investment managers make 36% and the platform providers make at least the same! No other industry would be able to sustain such high profit levels without competitors coming in to drive the costs down. So a form of Cartel is operating!

    RDR sorted out the Financial Advisor end, but they have not sorted out the true issue and seem reluctant to do so. Hidden costs still remain and exorbitant levels of profit. Me thinks the FCA is protecting its own and won't take appropriate action

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    1. Gareth,

      Agreed and 36% is an average - some will be much higher. Compare these margins with the supermarkets who operate on wafer thin profit margins and rely on large volumes to make it work. Of course there is real competition in the retail sector which just proves there is no real competition between asset managers and if they CAN get away with it, well...why wouldn't you I suppose.

      I really do not think the FCA have the small retail investor at the forefront of their considerations. The investors will however bring about change by continuing to move away from the expensive funds and into the low cost index funds offered by the likes of Vanguard. This will put an end to the cosy club.

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  3. It will be interesting to see the reaction of the existing platforms (and their share price) when Vanguard introduce a SIPP. I will have no issue with leaving HL if Vanguard are lower cost and have a comparable product

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    1. Yes Adrian, I look forward to see what the FCA report has to say about the platforms. The Vanguard SIPP will certainly be cheaper than HL but they would be well advised to open their platform to investors who wish to hold a wider choice of funds than just Vanguard - that would be the real challenge for existing providers.

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  4. I disagree with state intervention in this. Taking your supermarket example, everyone knows you can buy the same stuff much cheaper at Tesco than at Waitrose, Marks or Harrods. Yet people use their freedom of choice to spend where they like. Should we have legislation limiting the prices that Waitrose can charge?

    It is perfectly possible, today, to have a low cost investment SIPP or investment account that is very good value. But you need to be bothered to look for it. If people can't be bothered to do so, why should the state molly-coddle them?

    I reckon most readers of these blogs get good value from their investments; for example it costs me NOTHING to sit on a HL investment account if I hold shares or ETFs. HL can only do that because I'm being subsidized by others who hold funds. If the state intervenes, that subsidy will end. Everyone may pay less, but I will pay more. Be careful what you wish for!

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    1. Chris,

      As always, I guess its where you strike the balance between regulations which many would regard as useful and necessary and those which are restrictive, costly and bureaucratic.

      Once you have the basic in place leave it to market forces to sort out the good, the bad and the ugly!

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