In general, boutiques have said that more power concentrated in the hands of experienced fund buyers should favour them, while larger groups have argued that brand still matters in the post-RDR environment. A year on, what nascent signs are there of the RDR's impact on fund buying?
Supermodels
A widely discussed but little quantified impact of RDR is the preponderance of model portfolios and what it means for concentration in certain funds. With wealth managers now obliged to give two investors with similar risk profiles similar portfolios, they have had to ensure that when designing a portfolio for one investor, there is sufficient liquidity in the underlying funds to replicate that portfolio for a second investor.
This has, to some extent, been to the detriment of boutique managers, which have fallen behind in terms of growth – rising 3.9%, compared to the industry average of 7.9% according to the IMA's latest annual asset management survey. This trend appears to have continued more recently, with groups such as Cazenove and Newton picking up significant fund flows in a relatively short period of time, while boutique managers have struggled to gather assets.
It has increased concentration in certain funds. In 2011, 50% of fund flows went into the top 100 funds; by 2012, this had risen to 56%. While this may be popular with sales and marketing departments, it has left some fund managers with significant assets to absorb. Many – Aberdeen, Cazenove, First State, Schroders – have closed funds.
The situation has been compounded by a 'flight to trust', with large brands benefiting from a general risk-aversion among fund buyers of all types. Equally the newly non-advised consumer, disenfranchised by RDR, has tended to stick with the bigger brand names.
In general, there appears to have been little impact on the amount of switching. It might have been assumed that lower upfront costs would encourage more switching because there was less cost to doing so. However, advisers are also less incentivised to switch funds because they receive no commission for making the change. Again, model portfolios have an impact. If a fund is switched, it has to be switched across all portfolios.
Christopher Traulsen director of fund research, Europe and Asia, Morningstar, says he believes RDR should have the opposite effect, though it is difficult to see that clearly from fund flows yet.
He says: "The habit of chasing short-term performance to boost year-end figures should diminish. More experienced advisers should recognise the longer-term nature of clients."
While it is difficult to say whether it is a result of the harsh lessons of the financial crisis, or a consequence of RDR, performance-driven fund flows seem to be diminishing. Although equity funds inevitably benefit when equity markets rise, fund flows increasingly suggest that investors are well-diversified. One fund manager said that the idea of investing purely for capital gain was 'dwindling'. Rob Burdett, joint head of multi-manager at F&C Investments, says that investors increasingly like the 'jam today' of yield, rather than the more speculative capital gains. Performance-chasing still exists, but is less profound than it used to be.
Better educated clients
The fee debate is far from resolved. Although fund management charges appear to be levelling out at around 75bps for both open and closed-ended funds, it is not yet clear what the types of deal are that may be offered to certain platforms. Nor is the extent to which investors will be swayed by charges clear. A recent KPMG survey found that more of the high net worth clients – i.e. those targeted by the majority of wealth managers – were opting to go direct.
The report says: "There is already a discernible trend among affluent investors towards managing portfolios themselves without advice. Clients are also becoming more rigorous in their dealings with wealth managers, more curious about the robustness of institutions holding their money and more sceptical about investing in institutions’ own products." (KPMG: UK Wealth Management at the tipping point?). This suggests that the pressure may be on advisory fees rather than fund management fees, but it is early days.
For the time being, it is difficult to draw firm conclusions. But as fewer clients of any type seek advice, concentration increases in large fund management groups and fees have yet to fall significantly, it may not be the outcome for which the FCA had hoped.
