The FCA published its interim findings on competition in the asset management sector this morning. The first response I saw was ‘at last’. Whether or not it could have arrived sooner, the report includes some pretty incisive and stark observations. Upon first impression, it certainly doesn’t look like too little, too late.
While index-tracking has trended down in terms of price to well below 10 basis points (bps), within the institutional active management space, it is often in the 20-40bps range, while ongoing charging figures (OCF)s on actively managed retail funds are still often north of 90bps. More than that, the former two categories are more transparent and institutional management typically offers far stronger governance and greater accountability than the retail equivalents. And all that before we go anywhere near the dismal herding instincts of so many retail funds that purport to be active.
Transparency has forced the platform sector to get competitive, with the result that some players who once captured (largely undisclosed) revenues of 75bps or more now take fees of 30-40bps, amid a fiercely competitive landscape. Despite the grumbles of various observers, the sector has delivered real, positive benefits for clients amid this drive to transparency, and today’s news will lead that to become even more pronounced over time.
Hopefully today’s announcement will have a similar impact on the asset management sector, with the FCA introducing an all-in fee and enhanced reporting requirements. Shining a spotlight on the true fee active managers charge retail clients means the days of 90bps funds – which are probably nearer 120bps when other fees and turnover costs are included – might finally be over now that there is a requirement to present an all-in fee.
This will substantially reduce revenue margins and should give rise to better client outcomes. Sure, there’s no reason why pricing should be expected to fall to institutional levels as cashflows are less predictable and liquidity is harder to manage, but new technologies and better data analysis will be deployed to help bridge the gap, without necessarily resulting in a complete collapse in fund management profitability.
The businesses that will really feel the pain are not only the pure asset managers, but those so-called vertically-integrated (the dictionary definition of integrated is quite important here) businesses that are using platforms (or even adviser salesforces) as loss-leaders to drive client portfolios toward fat-margin, in-house fund managers. They, and their shareholders, could be in for more than a bit of disappointment.
To read the full interim report click here.