September 13, 2010 / 12:34 PM / 7 years ago

BREAKINGVIEWS-UK fund managers had it coming

LONDON, Sept 13 (Reuters Breakingviews) - They don’t come more pugilistic in the City of London than Terry Smith. Growth companies, competitors, box-ticking shareholders, the Association of British Insurers; he’s thumped them all. Now he’s squaring up to the fund management industry. It should be quite a contest.

Smith has a habit of voicing what others think but dare not say. His research which demonstrated how companies could recycle bid provisions into bogus profits cost him his job as an analyst at UBS. He went on to build a leading domestic UK stockbroker, Collins Stewart, and a money-broking business, Tullett Prebon.

The maverick is refusing to say how his new fund will cut the costs to investors, but reform of the structure of fund management fees is long overdue. Managers are typically paid a percentage of the funds under management. The fees do rise if the portfolio does, but they go up automatically if new investors join.

Getting new money in is more important to the manager than doing better with what’s already invested. Commissions to encourage investment, paid to Independent Financial Advisers (IFAs) for steering clients to the fund, are partly paid by the existing investors, while the manager gets all the benefit.

Under pressure from the European Commission, this may be about to change. The UK’s Financial Services Authority plans to outlaw commission payments, which may not be fully disclosed, and oblige IFAs to charge their clients fees instead. This change is designed to remove the incentive for advisers to pick funds which pay the highest commissions, rather than those which best serve the client’s needs.

If commission payments really do stop, rather than simply continue in another guise, the impact on the UK fund management industry could be profound.

The transparency demanded by the new rules will cause many IFAs to give up, and many customers will be forced back to the big banks, whose in-house funds are generally among the poorest performers in the market. By contrast, Tullett’s own pension fund has done well. If Smith can leverage that success into a low-cost retail fund, he will be able to add the banks to the list of poor performers he has upset.


-- Terry Smith is setting up Fundsmith, a low-cost open-ended investment fund aimed at retail and institutional clients. Smith is currently chief executive of Tullett Prebon, the FTSE250 money broker. He stepped down as chairman of Collins Stewart, the stockbroker, earlier this year.

-- For previous columns by the author, Reuters customers can click on

Editing by Chris Hughes and David Evans

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