The recent FCA Asset Management Study Interim Report is just that, an interim report, but as we wait for the final report it already feels like it has the potential to be one of the most influential and disruptive pieces of work to come out of the regulator for a long while.
There has been much speculation and comment as to how it might all play out, but in the main the silence from the asset management sector (especially the active side) has been deafening. Worryingly for advisers, as the dust settles from its publication it’s difficult to know exactly what will happen next.
On one hand, it’s worth remembering that nothing has actually changed and no new regulation has been introduced, but with the regulatory direction of travel becoming more clear it’s dangerous for advisers to be completely ignoring the findings. At the lang cat we think advisers need to be paying attention to this report now, and starting to account for the findings within their existing advice process. And there are three main areas to focus on….
Firstly, the central theme of the study was the costs paid by investors, and whether these are of value or are preventing a good outcome.
Advisers are already required to assess this whenever making a personal recommendation. COBS 6.1A.16g states that “In order to meet its responsibilities under the client’s best interests rule… a firm should consider whether the personal recommendation is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.”
Exactly what level of costs are reasonable, and "of value" is not specified, so it's up to the adviser to decide. A good practice could be to file check anything above, say, 200bps, and reject anything above 250bps. Whatever figures you use, it's important to focus on the total cost of ownership, factoring in all charges incurred. As the interim report says, “even small differences in charges can have a significant impact over time”, so this is certainly an area where advisers can add value.
Elsewhere, chapter 5 focuses on how intermediaries, fund rating agencies and platforms can influence the investment solutions the customer will end up invested in. There appears to be a case for further FCA work into the issues raised in this chapter, but this is also an area where advisers have an existing regulatory responsibility.
COBS 6.1F.1 states that “A firm which uses a platform… must take reasonable steps to ensure they use a platform which presents its retail investment products without bias”. Again, exactly what that means in practice is left to advisers to decide, but it’s certainly not something that can be ignored. We wrote a lang cat guide on this very subject a couple of years ago, which you can find here if you are interested in knowing more.
Probably the most hard hitting, and potentially disruptive statement in the interim report comes early on in section 1.2.5, with the statement that “Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs.”
This is an area where the FCA urgently need to clarify what this means for advisers. Since the paper was published we have been hearing advisers nervously question just how they can recommend active funds considering this statement. Such an extreme reaction is exactly that, but there is no doubt active asset management is coming under pressure.
During February 2017, tracker funds saw a net retail inflow of £712 million, double the flows achieved in February 2015. Their overall share of industry funds under management is 13.8%, compared with 11.3% in February 2015.
Whether the UK ever gets to the levels currently seen in the USA, where in 2016 70c of every $1 in new monies went to either Vanguard or Blackrock remains to be seen, but with big questions being raised of the asset management sector the FCA urgently needs to set out what the next steps of this work will be, and how their expectations of advisers might have changed.
(Tracker stats source: The Investment Association)