The Financial Conduct Authority’s interim report on the asset management sector could hardly be more damning. It accuses fund managers, particularly those who run active funds, of failing to do their job properly (since so few beat their benchmarks) and of over-charging for this sorry service (with average profit margins of 36 per cent across the sector).
Now, it may be that some of this language will be watered down by the time the FCA reaches its final conclusions. But the tone of this document, and the nature of the regulator’s initial proposals for remedies, suggests asset managers are in for a tough time. Having largely escaped the regulatory cosh that gave banks such a headache in the aftermath of the financial crisis, it is asset managers’ turn to find themselves in the firing line.
The industry’s response to the FCA so far might be characterised as “yes, but not me”. Everyone recognises there is a problem with underperforming funds with high and opaque charges, but no-one is willing to concede that it’s a fair criticism of their own products.
Asset managers will need to move on from this position. All will eventually be required to comply with whatever rule changes the FCA imposes. And the smartest firms will recognise that addressing the FCA’s criticisms in the most positive way possible, rather than looking at this purely as a compliance exercise, represents an opportunity to build stronger relationships with investors.
Remember, it’s not only the level of charging that concerns the FCA, but also the way in which charging is communicated to investors – the extent to which the impact of fees is explained, both at the point of sale and an ongoing basis.
In practice, there are going to be several different steps required to address this problem. The FCA’s proposal for an “all-in” single fee that includes all fund charges will help with transparency, but won’t, in itself, help investors understand the impact of these costs. So, in addition, as the regulator suggests, fund managers are going to have provide clearer information on the effect costs are having on returns – in pounds and pence.
Moreover, those illustrations will increasingly have to be bespoke. For asset managers lacking the functionality to communicate with investors digitally, that may be challenging. For those with good digital communications, however, this is an opportunity to build stronger bridges with investors – through, for example, the sort of interactive charging illustration tools that have been available online from independent analysts for many years now.
Nor should such functionality be confined to the area of charging. Digital channels offer asset managers all sorts of opportunities to provide investors with better information about performance – not just absolute and relative returns, but also extensive data on where that performance came from, as well as on risk management.
Again, these services will need to be bespoke and interactive. Investors should be able to interrogate the data they receive and to understand how it relates to them personally. This is no more than what an increasing number of investors – and the intermediary sector in particular – have been requesting for some time now.
In fairness, the lack of such functionality in investor reporting today partly reflects the legacy of regulatory reviews gone by, which have left asset managers with a responsibility to communicate with investors in proscribed terms. The resulting uniformity and generality have not served investors well and the FCA should consider that as it moves towards its final conclusions, particularly since all the evidence is that investors now want much richer reporting from asset managers.
However, the bottom line is that asset managers who genuinely are confident that they are delivering good value to investors have nothing to fear from the FCA’s review. In many ways, quite the opposite – if the regulator is able to free them from the straitjacket of the current reporting regime, and they are prepared to embrace the potential of digital communication channels, the forthcoming shake-up represents an opportunity to reach new levels of engagement with investors. That is an outcome which is in everyone’s interests.
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