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What do we expect from the FCA’s Asset Management Market Study?

On Wednesday morning (28th June) the FCA will publish the final report on their Asset Management Market Study. You can find further information about it here.

Based on what we saw in the interim report and subsequent work by the FCA, we expect to see the following issues being addressed in the final report:

  • Price competition, across active and passive fund management
  • Transparency of charges
  • Governance of funds
  • Performance benchmarking and assessment
  • Better movement of investor assets across different share classes
  • Investor fund selection processes and best buy lists

Tom McPhail, Head of Policy, Hargreaves Lansdown:

"The savings ratio is at its lowest level since the 1960s and cash rates are going backwards in real terms, so encouraging engagement with investment has a big role to play in consumers’ long term financial health. The challenge the FCA is addressing in its study is how the investment industry delivers value for money to its customers. Charges are of course an important factor, as are appropriate contribution levels, fund performance, and tax efficiency.

As with any industry, asset management has pockets of both exceptional and poor value. Many of the products that fall into the latter category are older and now look outdated. It has to be as easy as possible for investors to vote with their feet and for investment wealth to move from poor value to good. Technology has a significant role to play in this process, with investors increasingly accessing data and wealth management tools via mobile devices. It is also important investors have access to good quality information, help and guidance: the Financial Advice Market Review still has an important role to play in this regard.

The disclosure challenge for the FCA will be to strike an appropriate regulatory balance for investors. Too little information and investors can’t make informed choices; too much information and they tend to disengage. Most investors want some help in selecting and managing their funds, so the FCA will also have to address the question of how this help should be delivered.

Investment research has a critical role to play in helping investors get good value and to invest with confidence: if an investor had followed Hargreaves Lansdown’s Wealth 150 research since its launch in 2003, on average they’d have beaten the relevant Investment Association sector performance, they’d have beaten the average passive funds within those sectors and they’d even have beaten the appropriate index, and that’s after taking all investment charges into account.

Investors also now have genuine choice between low cost passive funds and good quality active funds, which come at a higher cost. We anticipate that the funds market will gradually polarise around these two ends of the spectrum, with the middle ground inhabited by mediocre active funds increasingly squeezed out of the picture."

What would Hargreaves Lansdown like to see from the final report?

  • Simpler, clearer cost disclosure (Option B in the interim study)
  • Build on the Financial Advice Market Review, to give investors straightforward access to the help and guidance they need from regulated intermediaries
  • Build on the successful competitive pressure investment services can bring to bear on fund managers
  • Hargreaves Lansdown clients pay an average 22% lower charges on its Wealth 150 + preferred fund list; we’d like to be able to do more of this
  • If performance benchmarking is to be given greater prominence then it is best achieved over a longer time-frame, for example rolling 7 year periods
  • Recognition that appropriate analysis of a fund manager’s past performance can deliver valuable information about both the fund’s style and the manager’s skill. While past performance cannot guarantee the same in the future, such information can assist in helping the investor to understand better how a fund might perform in different market environments. For example a manager that has historically bought high yielding large cap stocks is likely to perform relatively well in an environment where these stocks are outperforming and vice versa.
  • A recommendation that employees should be given the freedom to choose their own auto-enrolment pension provider If you want any additional commentary or information, do get in touch.