Although investors pay high fees for active management, “on average, these costs are not justified by higher returns,” according to the interim results of the U.K.’s Financial Conduct Authority (FCA) study of the asset-management market, which finds evidence of weak price competition in several areas. In response, the FCA is calling for a series of major reforms designed to improve the value investors receive from the asset-management business.
The FCA’s study found stronger price competition for passively managed funds, although it “did find some examples of poor value” in this area as well. In addition, this overall lack of price competition has allowed the asset-management industry to sustain high profits collectively, despite the fact that there are a large number of firms operating in the market.
In the wake of these findings, the FCA is proposing a series of reforms designed to improve competition in the market, such as a stronger duty on asset managers to act in the best interests of investors, “including reforms to hold asset managers to account for how they deliver value for money.”
The FCA is also calling for measures to help retail investors identify appropriate funds by beefing up disclosure requirements; making it easier for retail investors to move into better value share classes; and enhancing cost transparency for institutional investors.
The FCA is also planning further research on the retail distribution of funds, particularly focused on the impact that financial advisors and platforms have on the value investors receive from the asset-management industry.
“In today’s world of persistently low interest rates, it’s vital that we do everything possible to enable people to accumulate and earn a return on their savings, which can meet their lifetime needs. To achieve this, we need to ensure that competition in asset management works effectively to minimize the cost of investment,” says Andrew Bailey, the FCA’s CEO, in a statement.
“We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns,” he adds. “We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests. The remedies that we are proposing today aim to achieve these outcomes.”