The Financial Conduct Authority (FCA) is set to examine asset managers and advisers to determine whether there is adequate competition within the asset management industry. The investigation will also focus on charges to see if they are properly reflected in performance.
According to Numis, questions over competition are relevant due to the asset management industry being the most profitable UK industry with an average management fee EBIT of close to 38%.
The FCA’s results will be published in the summer of 2016, while the final report will be out in early 2017. If the FCA finds problems, it could introduce new regulation or refer the industry to the CMA for further investigation.
As a result of FCA’s inquiry, Numis expects various new measures which could place current prices under pressure. “Revenue margin compression is of course something the industry has already been experiencing for a number of years and we were already anticipating to continue (due to continued passive competition, more concentrated fund flows and more powerful/knowledgeable fund buyers). We believe this study may accelerate the existing trend,” the report said.
Earnings growth will lag assets under management (AuM) growth for most companies for some time, says Numis, and re-iterates their generally cautious sector view. “We find that while we might reasonably expect future industry AuM growth of circa 9% per year, with continued pricing pressure we believe this will translate into revenue, EBIT and staff remuneration growth of around 3% per year.”
Numis said it had already been anticipating relatively modest organic profit growth for most asset managers, which combined with relatively high earnings multiples has underpinned their generally cautious stance.
If the Numis predictions turn out to be correct “(…) this low organic profit growth could lead to intensified sector M&A activity, as CEOs increasingly look to acquisitions/cost synergies to achieve profit growth,” it said. Numis does not believe that further pricing pressure would spell disaster for the asset management industry. Instead, the investment research provider expects it to remain lucrative for both shareholders and employees.
The FCA inquiry follows complaints by consumers over the variation in fees between asset managers which, in addition, are not always transparent. “Our market study aims to ensure that both retail and institutional investors can get value for money when purchasing these services,” Christopher Woolard, the FCA’s director of strategy and competition told the BBC.
