Fund groups have been called out for their “scandalous” inaction after the first wave of value assessments reveal hundreds and thousands of retail investors in legacy share classes have only now been transferred into cheaper options.
Analysis from The Times looking at 12 fund houses that have published value for money assessments shows 321,000 investors were transferred from pre-RDR share classes into cheaper options.
Jupiter and Columbia switched 49,000 and 30,000 customers respectively out of more expensive share classes into cheaper unit classes in May, while Schroders did the same with 26,000 investors trapped in legacy classes as part of an £8m fee shakeup.
Invesco, which revealed £23bn worth of underperforming funds in its debut value assessment, said 107,000 investors had been moved into a cheaper share class between March and May 2020, saving them an average of 0.5% per annum.
The true number of investors that asset managers have transferred into cheaper share classes is likely to be higher, The Times noted. Only half of the fund groups it examined disclosed this number and a handful of companies, like Blackrock and Fidelity, have yet to release their reports.
Inaction from asset managers is ‘scandalous’
“It is scandalous that so many fund management companies have dragged their feet, rather that move clients into the cheaper share classes,” says SCM Direct co-founder Gina Miller (pictured). “It is even more scandalous that the FCA has not been decisive on this issue.”
Moving investors into less expensive funds along with cutting annual management charges across dozens of products, is expected to have produced average annual savings for investors worth £32m.
But Miller describes this as a “drop in the ocean” compared to the combined £21bn in revenue the industry rakes in every year.
“Since 2012 underlying retail fund management charges for actively managed funds have barely changed and the continuing record of the industry and the regulator in failing to ensure a competitive, fully functioning sector that ensures better client outcomes is shameful.”
Clients would still be in old share classes if not for assessment of value regime
Robin Powell, editor of The Evidenced-Based Investor, says the fact the industry has done “next to nothing” about legacy share classes, a problem it has known about for years, is “disgraceful”.
“Compared to being in a legacy contract with a utilities provider or insurance company, the sums of money that investors have overpaid to firms like Jupiter while stuck in legacy share classes is on a completely different level.”
He points to a report from Fitz Partners which showed that close to £184bn of UK investor money was languishing in share classes that still pay commissions to financial advisers last November. More than a fifth of these assets were in funds held by UK retail investors.
While the FCA banned the payment of commissions under the retail distribution review, advisers have still been able to pocket commissions on products sold before the rules came into effect in January 2013. In cases where advisers are no longer receiving services from an IFA, fund management groups have been able to help themselves to the commission instead.
“I’m certain that these clients would still be in old share classes had it not been for the FCA’s assessment of value regime.”
Direct investors are ‘small beer’ for asset managers
Value assessments are the FCA’s latest solution to prod asset managers to address the issue of legacy share classes. In April 2018, five years after RDR came into play, the City watchdog published its final guidance on changing clients out of pre-RDR classes into so-called “clean” and “super-clean” share classes.
Boring Money CEO Holly Mackay says compared with other larger institutional clients, direct books of business are “small beer” for asset managers.
“They typically fall by about 5% a year and not many managers have invested in this channel for decades – so this metaphorical dripping tap in the spare room never quite makes it to the top of the to-do list,” Mackay says.
Lang cat consultant Mike Barrett says to fund groups’ credit, there are a lot of complexities to navigate when switching investors into new share classes, depending on whether the funds are held directly versus via a nominee, and what the fund prospectus and terms and conditions allow the fund group to do.
“The final guidance gave fund groups the process to move clients (where appropriate) to the better value share classes, and the value for money statements created the governance framework to ensure this happens,” Barrett said.
“I expect all investors to have been moved by the time the first set of value for money statements are published.”
But Powell thinks the fact fund groups have been able to shift hundreds and thousands of clients into cheaper share classes as they hand in their value assessments proves this is something they could have done years ago.
The industry has “pretended that it was too complicated to move clients into cheaper share classes,” he says. “Now the regulator has told them to do it and, hey presto, it’s done.”
Hargreaves and SJP accused of ‘marking their own homework’
In addition to dragging their feet around the issue of legacy share classes fund groups have been accused of “marking their own homework” in their debut value assessments.
Every single asset manager that has reported to date has said they represent good value for money overall, even in cases where over half of their funds have underperformed net of fees.
“That is exactly what I expected to see in year one, a whole host of active managers telling us that their active funds that are underperforming are good value,” says AJ Bell head of active portfolios Ryan Hughes.
“In terms of these reviews, they are no more than worthless tick box exercises which are akin to companies self-certifying, marking their own homework,” says Miller.
Value reports from Hargreaves Lansdown and St James’s Place, two firms that faced their fair share of scandals last year, are prime examples of this, she says.
“In the Hargreaves exercise, their involvement in the Woodford debacle is not even mentioned in relation to their multi manager funds, and in the St James Place exercise where they found that less than 50% of its funds offered ‘good value’, they are yet to introduce any fee reductions.”
Initial assessments don’t drive costs down enough
Hughes thinks the first batch of value assessments have “only scratched the surface” and that it will take years before the reports begin to have any real impact.
One of the initial flaws of the value assessments is they don’t drive costs down enough, Hughes says.
“If all active managers are charging 75bp and they all compare themselves against the 75bp benchmark, then it makes it easy for them to say they look good value,” says Hughes.
Outside of the AMC and OCF there is still “massive variation” in other expenses incurred by funds, Hughes notes. Some fund groups charge only 1-2bp for things like administrative costs, accounting and custodial expenses, while other providers charge as much as 15-20bp.
Moving forward Powell thinks fund groups should be required to disclose all their fees and charges, including the cost of transactions, in their reports so investors have a better idea of what their net returns have been. He also thinks the FCA should require firms to state whether a fund has underperformed or outperformed against its benchmark over longer time frames of 10 to 20 years.
“If we’re asking fund managers to be judge and jury when it comes to assessing the value their products provide, they need to be given much stricter guidance on what’s required,” Powell says.
Another area which needs improvement across the board is the disclosure and sharing of planned remedial actions after the value assessment process, which is more important than the reports themselves, says Mackay.
“Publishing these statements without a ‘tick list’ was disconcerting to most so they played safe,” she says. “Now that we have some examples of good practice, I think next year’s process and reports will be more informative and force some more tough decisions from boards.”
