After more than 18 months, following discussions with almost 200 stakeholders from 135 organisations, a series of round tables and one-to-one meetings, the publication of an interim report and receiving 153 written responses, the Financial Conduct Authority (FCA) has published its ‘final findings’ from its asset management Market study.
The focus of the study was whether the market for investment products for both retail and institutional clients works well and offers value for money.
I have previously described that report as ‘disappointing, even worrying’.
In recognising that the industry may not be servicing its customers as best as it could, the interim report:
· Demonstrated a worrying lack of investment understanding when it held out passive investment as some kind of benchmark of value and suitability;
· Misunderstood the industry when it pointed to an apparent lack of price competition as an indicator of a weakly functioning market;
· Missed the opportunity to address one of the key weaknesses in the industry – the role and capability of the wide range of intermediators and their governance bodies.
How does the final report stack up against these criticisms? Overall the final report demonstrates the value of consultation.
The FCA has at least listened
On passive as a benchmark of value and suitability, the FCA has completely stepped back. The FCA had gone as far in the interim report to imply that the lack of (price) competition was holding back the growth of the passive sector and this was an indicator of a poorly functioning market.
I argued, firstly, that asset management is an industry that does not compete on price but on asset gathering and retention and that indicators here give a different view of the functioning of the market.
And secondly, that whether a product was suitable for a customer could not be reduced to cost or whether it tracked a market cap-weighted index.
In the final report, the FCA acknowledges right up front in its executive summary the criticism it has received. It completely backs away from its inferences on passive versus active with a throw away ‘motherhood and apple pie’ statement that ‘…it is important that investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs.’
On the lack of price competition as an indicator of a weakly functioning market, the final report does acknowledge that there is movement of assets away from poorly performing funds to better performing funds, and that there is evidence of fund closures.
It still points to price clustering and stickiness, but now focuses more on transparency of costs and charges, and accountability for performance. This demonstrates a better understanding of competitive forces.
As I have previously argued, not only do asset managers not compete on performance, in the interests of consumers you would not want them to do so.
Competition for assets is thriving and is based on factors such as investment performance, service, advice, product development and risk management.
Surely the FCA would not support customers moving their assets to a poorly performing manager or highly unsuitable product simply because it is cheap? An investment experience based solely on price alone will undoubtedly be a bad one.
Price is not everything
The move in focus away from price competition is appropriate. Instead, the FCA’s proposal for a single, all-in standardised charge that is transparent to investors is, in my opinion, long overdue and should be supported. First noises from the industry are that they will do so, even though the industry is divided in the treatment of some costs such as payments for research.
I also have empathy for the FCA’s desire for more accountability by managers for their investment performance.
Although investment performance remains one of the key competitive pressures on managers, our ability to ‘colour’ our performance reality is an art.
I am sure I am not alone when I say that this is an art in which I have developed some expertise over the years. With the shoe on the other foot, as a fund selector I see it as one of my primary responsibilities to look through the investment performance smoke that can be put up.
Finally, the FCA makes a recommendation on minimum standards for independence in the governance structure of asset management firms. In general, I believe we are reasonably well advanced in this respect. However, I acknowledge that there are some stubborn corners of resistance, including listed firms, where this ‘gentle’ reminder of best practice is overdue.
Overall, these are positive recommendations that will help improve customer experiences, but they are hardly radical or game-changing.
I have previously argued that the FCA was looking in the wrong place if it wanted to have a meaningful impact on customer experience in the asset management market.
Economic Darwinism is alive and well and getting more embedded in the manufacture and distribution of asset management products, and the FCA’s recommendations on transparency, accountability and governance will help establish it further.
But when it comes to identifying a leap jump in consumer experience, the FCA should look at those who stand between the end customer and the manufacturer and distributor.
Focus on the intermediary
The conflicts of interest and the weakness of the business model of the investment consultants has been a widely known open secret for far too many years. At a minimum I argued that they should be brought into regulatory scope – this the FCA is now recommending, although it should go further and insist. Quite frankly, where has the FCA and its predecessors been?
The investment consultants offered some concessions in response to the interim report in order to avoid a reference to the competitions czar which the FCA has quite rightly rejected.
However, the problem does not end here. Almost as an afterthought the report notes that the FCA ‘…also have concerns about the value retail intermediaries provide’.
If the FCA bemoans the stickiness of assets with underperforming managers, if it is concerned about the suitability of some products for non-professional investors, if it is surprised to see £109 billion of assets with active managers pursuing full fee ‘closet index’ strategies, if it is concerned about the ability of retail investors to understand the information they receive, where should it look for remedies?
The investor himself is certainly not the place. Relying on self-policing by the product manufacturer is unlikely to yield speedy or significant results.
Surely the place to look is at those who offer advisory services or protections to the lay investor. Not just investment consultants in the institutional space, but financial advisers, wealth managers, governance bodies overseeing fund platforms and trusts.
And then there are the investment platforms that are intermediating the investment decision and surrounding it with ‘research’, at the same time making it easy for the lay investor to invest without any checks on suitability or understanding.
Either these intermediaries exist because there is a need to protect and support the investor, in which case the FCA should be all over their competency and value for money; or they are not needed in which case they should be closed and the customer spared their fees.
Clearly they are needed, but announcing a market study on investment platforms and referring the big three investment consultants to the Competitions and Markets Authority seems poor reward from an 18 month long study and extensive engagement with the industry.
I hope the FCA’s ‘final findings’ are far from final.