U.K.’s FCA Takes Aim at Asset Managers

Competition and scale don’t bring lower fees for investors, the Financial Conduct Authority finds in a new report.

In the technology world, intense competition forces down the price of even the most innovative products soon after they appear. That’s not true in asset management. When it comes to actively managed funds, despite hundreds of rivals in every market, fees have remained stable and profits high for providers.
That’s one finding by the U.K.’s Financial Conduct Authority in its new interim report on the asset management business. Last November the regulator said it would study competition in the industry and the value that investors get from asset managers. In the interim report, the FCA notes that investors are often confused about their funds’ investment objectives and the appropriateness of benchmarks that managers use to clock performance.
The final report will be published in the second quarter of 2017. The FCA has said that it will also investigate consultants and their role in advising institutional investors, particularly smaller ones; to that end, it’s seeking comments from the consulting industry until next February.
The interim report states that between 2011 and 2015, fees fell from an average of 1.13 percent to 0.91 percent, but the agency attributes that drop partly to investors’ increased use of lower-cost passive funds. During those four years, passive investments climbed from 10.4 percent to 16.4 percent of total assets in open-end U.K funds. Fees for passive vehicles were cut in half, to 0.21 percent, over the same period.
But fees for actively managed funds hardly budged. In 2015 the average was 1.05 percent, versus 1.21 percent in 2011. The FCA said the average fee for equity funds is clustered around 0.75 percent to 1 percent, pointing out that this range is consistent with its finding that most asset managers are reluctant to undercut competitors to win new business. It also found that scale doesn’t lead to lower fees. “Economies of scale are captured by the fund manager rather than being passed onto investors,” the report’s authors wrote.
As for remedies, the FCA is asking for comments from fund companies, but it recommends that asset managers do a better job of acting in the investors’ best interests by appointing independent boards and documenting how they deliver services that offer value. The regulator also proposes an “all-in” fee so investors can see at a glance what they’re paying for money management.