Regulators are finally starting to discover something that academics have been preaching for years: many retail investors are paying high fees for asset management and receiving dubious value for their dollars. As policy-makers catch on and take up those investors’ cause, the investment industry must be prepared to change.
The latest signal that regulators are waking up to some of the harsh realities of life for retail investors comes from the U.K., where the Financial Conduct Authority (FCA) has published new research that found, among other things, that there’s a lack of price competition in the asset- management industry. As a result, industry profits are fat and investors are paying high fees – particularly for active portfolio management, which often does not deliver value in the form of portfolio returns. Passive products come off somewhat better, but the FCA found instances of investors receiving poor value there, too.
As a result, that regulator is proposing a series of reforms designed to ensure that investors get more bang for their buck.
The asset-management industry in Canada is likely to face its own regulatory reckoning soon. This month, the Canadian Securities Administrators (CSA) is expected to publish a paper that sets out fundamental reform proposals designed to address that group of regulators’ concerns with the current structure of the domestic investment fund business. The CSA has signalled that it intends to propose a possible ban on embedded compensation structures, although the regulators appear to be open to alternatives.
At the same time, the CSA is contemplating the introduction of a “best interest” duty (at least, in some provinces). And the most important components of the second phase of the client relationship model (CRM2) reforms are slated to kick in by early 2017, giving investors a clearer view of the costs and performance of their portfolios. The CRM2 reforms, by themselves, could have a seismic impact on industry economics.
In this environment, the retail investment business should be bracing for change or, better yet, getting ahead of the game.
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