By James Wood, consultant at Simplify Consulting
The Financial Conduct Authority found “evidence of weak demand-side pressure on fund prices, resulting in uncompetitive outcomes for investors in authorised funds” after a review into asset managers in 2017.
As a result, the City watchdog asked firms to have their own Assessment of Value (AoV) processes to ensure they are charging fair fees, which they reviewed in August last year.
Although most of the 14 managers the FCA spoke to demonstrated a better understanding of the rules, some of their processes are not up to scratch. Here, we take a look at the main findings.
No reduced fees for poor performance
The issue of fund performance has become more visible in recent years, both within the industry and to investors. We have seen consistent underperformance from some major asset managers, but what is not evident is the reduction of fees and charges to align with poor performance.
The FCA found that none of the 14 firms included in the review reduced their fees to reflect the poor performance of their active funds against their respective benchmarks.
Asset managers need to evaluate performance and then decide if the fees they charge to investors demonstrate value for money, or if not, identify the challenges to improve fund performance and take the appropriate actions to show improvement.
If managers can’t improve performance, they must consider if the product offering is right and implement changes to justify the fees they charge. If this is not possible, then reducing fees needs to be considered – or whether the fund should remain on sale.
Fees need to reflect the quality of service
Value should not be defined and measured solely on fees versus performance. Managers may charge higher fees compared to competitors with similar funds (whether they are underperforming or not) because they offer better products and services.
Measuring value should consider more than fund performance – it should include the customer’s journey and the level of service provided to investors.
Senior leaders must make sure the appropriate governance, with clear metrics to measure performance and oversight, are implemented.
There have been instances where boards which oversee the AoV process did not take accountability for the fees charged on funds, telling the FCA they were determined by more senior committees.
This is fine if those decision-making groups outside the board understand the responsibilities imposed by the regulator, but if not, they must take greater steps to make sure those groups are better informed.
Lack of transparency
Investors rely on asset managers to provide good value for money and act in their best interests, which the AoV is designed to achieve, but failure to be transparent about the value provided through fees may lead to a lack of consumer confidence.
This could discourage people from investing or seeking alternatives which offer better value for money. Why would an existing investor remain with – or a new investor approach – a manager if they are charging unjustifiably high fees for poor performing funds with services that are inferior to their competitors?
We have seen questionable examples of asset managers not being as transparent as they should have been, including one instance where the share classes offered by a firm were not the best available at the time.
Asset managers will benefit from fostering transparency in their fees charged and services offered. If they continue to fail, not only could they lose investment, but they may face consequences from the regulator, imposing fines or sanctions that could lead to greater loss of reputation.
More work is needed
Although it is a challenging time for asset managers, they must strive to deliver good value for money and fair outcomes to investors and demonstrate a transparent financial environment.
Some are meeting the standards expected by the regulator, but others have work to do if they want to tighten their governance and provide more clarity around how they define value for money.
Managers need to conduct regular and rigorous assessments for AoV and take appropriate actions to address any shortcomings, or risk further measures being implemented by the regulator. With the FCA expected to start revisiting this in 2024, they must act now.