RDR failings?
Ryan Hughes, head of fund selection at AJ Bell, said while progress is being made, there were several proposals worthy of greater consideration.
He points out that the report makes clear the unbundling of funds charges and the rise of the “clean share class” since the RDR had somewhat failed in one of its objectives.
He said: “One of the most interesting conclusions from the report is that the unbundling of fund charges since the RDR has had virtually no downward impact on active fund charges. The RDR was a success in many areas but there was an assumption that it would reduce the cost of active fund management and it didn’t achieve that.”
Today’s FCA paper highlighted the reluctance of active fund groups to reduce charges in order to attract new money, but Richard Romer-Lee, managing director at Square Mile, disagreed.
While conceding he was still considering the entirety of the paper, he said he believed there were signs of downward pricing pressures in the active space as well, but it was early days.
“We all know the published rate is not what everybody pays. We are seeing various groups start to cut their fees on active funds in order to be more competitive. There is clearly a drive towards greater competition, innovation and transparency and that is sensible but we all have a part to play.”
With £109bn in ‘closet trackers’, there is clearly a huge number of private investors not receiving value for money, with the managers running those assets under a huge degree of pressure, according to David Morrey, partner at Grant Thornton.
He said: “We believe the FCA end game is not necessarily to drive fund costs down overall but rather to have greater price discrimination between funds with different strategies. That potentially will make life very difficult for active funds which are actually ‘closet index trackers’.”
On these “partially active” funds, Barratt added: “These investors are paying active management fees for little if any active management, which as the FCA reminds us ‘are considerably more expensive than passive funds’.
“Even the passive boys are not immune from criticism here, with £6bn invested in passive equity funds with an OCF equal to or above 1% for bundled or 0.5% for clean.”
Barrett noted that for a regulator that prides itself on its core principles of treating customers fairly to state, quite clearly, that “investors in these products are likely to benefit from switching to better quality, lower priced passive funds in the same investment category”, action was clearly needed.
Similarly, where a better deal was being sought through a cheaper share class, the process required to do so was blamed (by the asset managers) for its difficulty in switching – even if that would be in the best interests of investors.
This was said to be because investor consent was required to transfer and very few end investors actually had a direct relationship with their asset manager – and few end investors responded to communication when it was attempted.
That sounds like a bit of buck passing and one can understand why the FCA might feel the need for greater accountability.
