LONDON (Reuters Breakingviews) - Asset managers are uncompetitive, too profitable and don’t think enough about investors in their funds. Those are the broad findings of a nineteen-month probe by Britain’s Financial Conduct Authority, published on Wednesday. Those conclusions, mostly previewed in an earlier report last November, hit harder than the watchdog’s prescriptions. The big question is whether, once managers have been whipped into shape, clients will become more discerning.
Central to the FCA’s vision is discipline and transparency. The watchdog argues that customers should see an “all-in fee” that tells them how much they pay to have their money managed – including trading charges. Funds should be clearer when comparing their past performance relative to benchmarks, and use more ambitious yardsticks. Meanwhile, fund managers will be required to act in the best interests of investors – which implies they don’t always do so already. The FCA has also ensured it has a healthy workload for the foreseeable future, through an investigation into investment platforms, and a vague hint that hedge funds and private equity firms may be in line for future scrutiny.
The conclusions may be bold, but there’s a sense that some punches have been pulled. All-in fees and benchmarking practices, for example, will be consulted on before they are implemented. Some gradualism makes sense, given the uncertainty around Britain’s departure from the European Union, and the imminent implementation of the so-called MIFID II rules that already promise to bring more transparency to the industry. Shares in Jupiter Fund Management and Aberdeen Asset Management, which Morgan Stanley analysts estimate have the highest percentage of UK clients among listed managers, rose slightly by late morning on Wednesday.
What’s still missing is a good explanation for why investors accept such a raw deal. A study of the market showed that prices for active asset management haven’t much changed in a decade – and that the average firm has a hefty operating profit margin of 36 percent. Yet the industry isn’t obviously highly concentrated. The recent spate of mergers also supports asset managers’ complaint that life is getting tougher. The problem might lie with consultants and financial advisers who act as intermediaries, who will now face further investigation. But the other conclusion to draw is that customers don’t care enough to shop around for a better deal. Fixing that problem deserves deeper scrutiny.
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