I was rather looking forward to seeing the Financial Conduct Authority’s final report on the asset management industry. Its interim report – out last November — was a criticism-jammed corker, so hopes were high that this week’s report would be just as entertaining for those of us in a state of permanent irritation with the fund management sector.
The first bit didn’t disappoint. The report notes that while funds should compete on price (given that it is the only thing we know in advance), they clearly don’t. If they did, the industry wouldn’t make consistently high profits (an extraordinary average net margin of 36%) and the cost of funds that claim to be actively run wouldn’t have been static for a decade (at an average 1.6%) at a time when you can buy a perfectly adequate passive fund for 0.2%.
It recognises that paying a high price for a fund does not guarantee good performance, it only raises the risk of poor net performance. It clocks that fund management firms do not automatically put the interest of their clients first — something of a shame given that, one way or another, we have all outsourced our hopes and dreams to them — and concludes that “investors may not be achieving value for money” (bureaucratic understatement at its best).
All in all, as David Morrey of Grant Thornton said quite rightly: “If you didn’t like the interim report, you won’t like the final report.” You might, however, be rather relieved by it. That’s because, while the FCA has not pulled back from complaining about the wickedness of the industry, it has softened on forcing solutions.
It tells us lots of things should happen: the obligation for fund managers to act in the best interests of investors should be strengthened; managers should have at least two independent directors on their boards; a stunningly awful practice whereby fund managers make money (known as box profits) out of keeping the difference between the bid and offer spread on their funds even if the deal is matched internally (so the spread doesn’t exist) should be banned; managers should be clear about which benchmarks they use and how using them alters their strategy; and there should be an “all-in fee” that tots up every single cost to the fund (including trading costs) so that investors can compare funds on a like-for-like basis.
What the report does not do is insist that all these things are done immediately. Take my particular interest, the all-in fee. Mandatory standardisation of charging: one fee, with absolutely everything in it, calculated in the same way by every firm. Introducing it would bring transparency and lower prices into the game instantly. Lovely. The report says the FCA “supports” it. But they aren’t insisting on it now. There will be a consultation – consultations galore, in fact. “What do we want? Fund managers to, you know, think a bit about their customers. That kind of thing. When do we want it? Soon. Well soonish. After a bit more consultation. Can’t ever have enough consultation.” Not exactly a day of rage, is it?
So what changed between the interim report and the final report? Read the whole thing and you will soon see the answer: a whole lot of doubt-spreading by the industry.
My favourite part comes on page 84, where the FCA reports on conversations with stakeholders about the all-in fee. It turns out that several respondents were concerned about the “practical complexities” of an all-in fee. It’ll be hard to figure out transaction costs, they said. After all, trading costs “cannot be predicted accurately ahead of time”.
This is absolutely killing. This group of people insist that it makes sense for us to pay them outrageously high annual fees on the basis that they are so good at complex forecasting — they can can tell us look at, say, the 2,000 stocks listed in the UK and forecast which of them will do better over anything from a six month to a 10 year peiod than the others based on a pile of mostly made up spreadsheets. This same group of people also insist there are insurmountable “complexities” in extrapolating what their own trading costs will be over a 12-month period from decades of their own data. Hilarious.
My next favourite bit is where more stakeholders (probably the same ones) tell the FCA they are a bit worried about this all-in fee thing because bundling costs into one number might make it “harder to compare funds” — as if having lots of different numbers and some really important ones not disclosed somehow makes it easy.
Then there is the bit where they say they are worried that an all-in fee will make UK funds look more expensive. This misses (presumably on purpose) the whole point of the exercise: to show just how expensive they are. These aren’t the only bits in the report that made me giggle, but I think you get the picture: no industry gives up huge profits without one hell of a fight.
The good news is that the cat is out of the bag. The FCA knows what the industry is up to. The smart money in the industry knows it knows. Aberdeen’s Martin Gilbert gets it: “I have stated several times that I am in favour of all-in fees including all costs”, he said this week.
And most importantly of all, consumers are getting it too. Fifteen years ago all the shockers in the FCA report would have been news to the average fund investor. Now they are all well known. So change is coming anyway, partly through the work of the FCA and some new regulation on the way from Europe, but also from the better managers pushing for it and the smarter of the consumers insisting on it.
All these things will work. Still, that doesn’t mean we can down tools. There is more work to be done. So here’s a challenge for Mr Gilbert: do it – make the merger of Standard Life and Aberdeen the catalyst for introducing an honest all-in fee across the funds of the combined entity.
Here’s one for the FCA: move faster. And one for investors: vote with your feet. There are fund managers out there charging perfectly reasonable fees (one good one told me last week that his firm’s “direction of travel” is to get the management fees on all their funds down to 0.5%). There are funds that return the benefits of scale to their investors by offering to drop their fees as their fund grows. And there are funds that are run in a genuinely active way. Buy those and sell the others. That should do it.
• This article was first published in the Financial Times