Regulation of the fund management industry has come a long way over the past 20 years but is there still need for improvement?
Has the regulator made things more complicated than they need to be? Is the industry still too much in the hands of salespeople rather than service providers? The answer to these questions is a qualified yes.
Many press reports have highlighted the greed of the City, explaining in detail how fund management companies are ripping off investors. That is not to say it is not happening. It was not that long ago that there were index-tracking funds with a 6 per cent initial charge.
But by and large, there is uniformity to charges in the active fund management world. The industry norm is an initial charge of 5 to 5.5 per cent, often discounted to consumers by intermediaries, plus an annual fee of between 1.25 and 1.5 per cent.
These charges cover a range of complex items – the buying and selling price of the fund, stamp duty reserve tax as well as custodian and admin costs.
The picture is different on the life side of the industry where product charges vary widely, making the fund industry’s charging structure look simple.
Hargreaves Lansdown chairman Peter Hargreaves believes there is scope to improve for fund firms, particularly with the added layer of the performance fee.
Hargreaves says this charge adds no value despite claims that performance fees align a manager’s interests with investors. In order to do that, fund managers who underperform should have to pay into the fund, says Hargreaves.
The other thing he highlights is the lack of ability to compare the costs of funds although he does say that total expense ratios are becoming more widely used.
But Hargreaves does not advocates cheap funds as being value for money and in some cases the more expensive fund can be better value but it is difficult to determine or compare.
He believes too much attention is paid to the initial sale of a fund. He points out that years ago car salespeople only cared about selling a product for high commission until firms discovered they could do better if they focused on serving existing clients rather than just trying to attract new ones.
“We are doing the opposite. As an industry, we are busy selling more complicated, less reliable products and no one is out there prepared to help on an ongoing basis,” says Hargreaves.
HSBC Investments head of retail Andy Clark believes simplicity is the way ahead.
He says: “I do not think we work together, mostly because of all the different agendas. It would be better if things operated more generically and we spent more money on servicing existing clients rather than on the next big marketing push.”
The emphasis on marketing is leading to cynicism on fund launches. Look at the comparison some make between the raft of technology funds launched at the height of the TMT boom to the number of property funds being launched today.
Clark says: “Intermediaries get jaded by marketing spin. We need to spend more time educating people about the investment concept rather than pushing a product.”
He says honesty should be the best policy when it comes to investment ideas.
Artemis head of communication Nick Wells says: “It can be hard to play depending on the situation, like a manager leaving, because there are often journalists who are looking for a story but also there are people internally to consider and litigation issues. But it makes huge sense to come forward with information as soon as you can. There is no better policy than honesty.”
It was this policy that led many intermediaries and fund of fund managers to stay with ABN Amro’s funds when star managers Nigel Thomas and George Luckraft departed for Framlington. Rumour has it that ABN Amro turned away applications into the funds in an effort to be straight with investors over the departures. Investor goodwill remained with the firm and, when the deal with Artemis happened, many felt they had been treated fairly.
Wells feels the influence of the regulator has made investor communication easier and more transparent. Clients receive twice-yearly fund reports, prospectuses contain greater detail on charges and performance, and existing and potential clients can increasingly gain access to these online as well as via intermediaries.
The description of a fund and its investment policy is also a lot clearer, says Wells. This can be seen not just in changes to fund names but in the increase in the amount of information in the market.