The Financial Conduct Authority (FCA) has published an interim report on its Asset Management Market Study. Some of the results are not that surprising, but others are.
For example, it reports that around half of retail investors were not aware that they were paying fund charges. Needless to point out perhaps that can be linked to another conclusion. Namely that there is weak price competition. How can investors be expected to compare prices when they are not even aware of the charges?
Indeed very few asset management firms told the FCA that they lower charges to attract business, particularly for retail investors. They do not believe that would win them more business. Surely retail investors are suckers for the pitch that goes something like this: “you want the best managers to get you the best returns, and that is more important than the cost”. Retail investors are often like buyers of wine – when you don’t know much about wine you tend to buy on price – the more expensive it is the better it must be. Unfortunately that is not how it works in reality for investment funds. As the FCA report states “there is no clear relationship between price and performance – the most expensive funds do not appear to perform better than other funds before or after costs”.
Even where fund size increases, price does not fall, according to the FCA. They suggest economies of scale are captured by the fund manager, rather than being passed onto investors. In addition they have identified a number of expensive funds which are closet index trackers and hence should really be lower cost.
Retail investment platforms also do not seem to bring pressure on pricing by the pooling of assets and the FCA “also have concerns about the value provided by platforms and advisors, and are proposing further FCA work in this area”. Let us hope they are quaking in their boots over that comment.
The FCA has a number of suggestions for remedies upon which it is inviting feedback (ShareSoc is likely to send in some comments so let us know if you have points you would like made). Some of the proposals include clearer charges, strengthening the duty of asset managers to act in the best interest of investors and providing retail investors with tools to identify persistent underperformance (although they spell out that relying on past performance data is problematic as there is little evidence of persistence).
The full FCA report is available here: https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf . It certainly emphasises that retail investors can be woefully ignorant, but without proposing good remedies for that problem. Now if we could encourage them all to join ShareSoc, we might improve upon the situation!