Last November, the FCA published a study criticising the value of active fund management, saying that the additional fees often associated with active fund management did not result in better performance compared, for example, to passive funds.
The FCA said competition between fund managers was often ‘weak’. Tomorrow morning, a statement is expected with the final report.
To address the lack of transparency of cost and performance information, which renders comparison between products difficult, the FCA has proposed the introduction of a single fee for investors, inclusive of all costs.
The FCA’s findings showed that actively managed fund charges have stayed broadly flat for the past 10 years, suggesting “weak price competition” among asset managers, while charges for passive funds have fallen.
The study met with a mixed response from the fund management sector.
The FCA has said: “Investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark.
“There are a wide range of investors in the institutional market. This includes many small pension schemes which rely heavily on the advice of consultants.
“We have found concerns about the way the investment consultant market operates.”
UK’s asset management industry manages nearly £7tn of institutional and individual assets. Over three quarters of UK households with occupational or personal pensions use the services asset managers offer.
The FCA said the asset management industry has seen sustained, high profits over a number of years.
Moody’s has said the FCA’s proposals could entail risk for the sector. Compliance and operational costs “will certainly go up”, it warns, while fees come down, pressuring active asset managers’ profit margins and potentially spurring consolidation.
The company said that active fund managers are not currently structured to operate at “significantly lower fee rates” and the FCA’s proposed fee structure will require significant expense reduction. Cost management and economies of scale will likely become a priority and translate into market consolidation.
As the competition with passive investment intensifies, asset managers will also focus on adding value for investors and will have to adapt their business models to a more competitive environment, it said.