A Financial Conduct Authority review of almost 20 fund managers found that most have not implemented appropriate Assessment of Value (AoV) arrangements.
The regulator reviewed 18 fund managers between July 2020 and May 2021, covering a range of business models and sizes to assess the standards of AoVs in place.
According to the review: “Too many Authorised Fund Managers (AFM) often made assumptions that they could not justify to us, undermining the credibility of their assessments”.
AFMs are required by the FCA to carry out an AoV at least annually, introduced after the Asset Management Market Study in 2015.
That study found evidence of “weak demand-side pressure” in the authorised funds market, which resulted in a lack of competition on fees and charges.
FCA might have to enforce more prescriptive approach
Jason Hollands, managing director of corporate affairs at Tilney Investment Management, said: “This is effectively akin to a school report that concludes ‘unsatisfactory: must try harder’ and given the strengthen of the criticism I’m sure that fund companies will be urgently reviewing their AoV approaches to address this. If they don’t, they may end up with a more prescriptive approach being enforced.
“It would help investors to see greater consistency in approach across providers, for example with performance compared to relevant market benchmarks where they available, not just an assessment versus a peer group average,” he added.
According to the FCA’s review, a disproportionate amount of time was spent looking for admin service charge savings, rather than reviewing the costs of asset management and distribution. It also found that most had “poorly designed processes” that resulted in incomplete AoVs.
“It’s clear that there is significant room for improvement pretty much across the board. The value of these documents was always likely to come in year two and three when it becomes much harder for asset managers to keep claiming underperforming funds are still delivering value for investors. This review from the FCA will act as a reminder for asset managers of the importance of the process,” said Ryan Hughes, head of active portfolios at AJ Bell.
“There has seemingly been little progress in driving down the core cost of asset management while the role of the independent director was much heralded at the time as a driver of change and ensuring strong and robust governance. It seems that the comments from the FCA show that sadly, so far, it looks as there is a lot further to go before this process is working effectively and investors see real and tangible benefits of the AoV process.”
AoV reports have been catalyst for change at Schroders and Blackrock
Interactive Investor, however, said that while those reviewed by the FCA have fallen short of the required standards, the AoV reports have been a “catalyst for change”.
“Schroders has simplified its charging structure, after finding that nine out of 86 funds had not demonstrated value in its first set of reports. Blackrock, the world’s largest asset manager, moved 14,000 investors into cheaper share classes last year, delivering savings of £3m,” said Moira O’Neill, head of personal finance at Interative Investor.
“With higher standards, we could see even more change, so we welcome today’s statement from the regulator. But we’d also like to see more guidelines on the reporting of value for money statements. They are frustratingly difficult for ordinary investors to find and require journalist-like investigative skills. It need not be so difficult.”
