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FSA: Fund groups should compete on fees not future performance

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Financial Conduct Authority chief executive designate Martin Wheatley has challenged fund managers to compete on lower fees rather than future performance and says they should be working more closely with advisers.

Speaking at an FSA asset management conference in London today, Wheatley said the issues of hidden charges, the impact on overall returns and whether fund managers were acting in investors’ best interests needed to be addressed.

He said: “We might ask ourselves whether it is a problem that the industry appears to compete predominantly on the aspirational aspect of its service, the future performance, when it is the one thing that cannot be compared and measured by potential investors.

“Is it a problem that consumers are buying a service whose quality cannot be measured until much further in the future when it is often too late to realise the product was the wrong choice or excessively costly?

“Some may say that is simply the nature of your business.  But should we be concerned that asset managers compete less on the immediately measurable aspects of their offering such as fees?”

Wheatley said the RDR aims to be a “catalyst” for the industry to focus on the charges issue, but acknowledged that not all costs are down to fund managers and said the question of why investment intermediation costs remain high needed to be tackled.

He added it is down to the fund management industry and advisers to help consumers find suitable investments.

Wheatley said: “This could be doing things like making it easier for consumers to make rational decisions, increasing transparency around fees and charges, and being competitive on these immediate, factual aspects like fees, rather than projected future performance. 

“At the FCA we will expect asset managers to work more closely with the intermediaries that sell their products.  The truth is that asset managers can no longer distance themselves from the advice or sales process.  Our view will be that the originators of products need to consider how they will distribute them as part of the design process.”

Wheatley also mentioned the creation of a new department at the FCA which will combine market intelligence with better analysis of risks to consumers. The FCA will then use this to develop policy and in its supervision of firms.

Page Russell director Tim Page says: “Wheatley is echoing a truth universally acknowledged within the industry for some time that there are too many closet trackers charging active fees and not delivering good value.

“The FCA will supposedly not be a commercial regulator. But it appears to be interpreting its competition powers quite widely, and as a result Wheatley’s focus on price is worrying for the entire sector.”

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Comments

There are 33 comments at the moment, we would love to hear your opinion too.

  1. Great, yet more accountants!!

  2. Clearly we will have problems going ahead.

    Wheatley is to regulation is what Gaddafi was to human rights

  3. Whilst we all know fees are part of the issue and certainly transparency is vital and it is inevitable that providers will compete competitively, however it seems that Mr W is forgetting the basics of a free market, attempting to tinker with the system displays an inability to understand it. If you remove risk you have no market. Is anyone else worried that this guy doesn’t understand either business or economics?

  4. Good grief – the final proof, it was ever needed, that the FSA really do not care what the end result is for investors. They are obsessed with process and seeing their boxes ticked. How the client fares is of little consequence. I thought the debacle with retail banking (the roots of which were in the abandonment of account charges, in the interests of – yes,! – cost!!!!!!) would have taught the FSA a thing or two. Obviously not.

  5. Martin Wheatley said:

    “….the RDR aims to be a “catalyst” for the industry to focus on the charges issue, but acknowledged that not all costs are down to fund managers and said the question of why investment intermediation costs remain high needed to be tackled.”

    Anything to do with regulatory costs Mr Wheatley?

    And:

    …”This could be doing things like making it easier for consumers to make rational decisions, increasing transparency around fees and charges, and being competitive on these immediate, factual aspects like fees, rather than projected future performance”

    Might this strategy be also applied to FSA/FCA costs and overheads Mr Wheatley?

    Perhaps starting with Management remuneration? Not to mention high cost offices in London, and extortionate and excessive Hotel and Transport costs.

    Here in the real world, a lot of people think you’re all taking the p..s..

  6. So we shouldn’t take account of past performance or future performance when deciding where to invest client money. I’m starting to get a bit lost…..

  7. I imagine that Wheatley lives in a caravan, wears suits from Asda, drives an old Maestro and feeds his family on Tesco Value food.

    Price is only part of the purchasing decision. It needs to be clear but it should be left alone for the market to decide.

  8. Clearly this is bonkers. Another reason why I am wondering at 35, if this is an industry worth staying in.

    A waste of qualifications but hey.

  9. Next time I go to a surgeon for an operation, or ask somebody to fly a plane for me I will simply ask what his or her salary is. I do not care whether they have experience.

    After all, past performance is no guide to the future. Is it?

  10. So now i know everything I buy in life should be based on price !! Whilst transparency and competition on cost is part of a free market, once quality is brought into the mix it complicates things.

    When i have my house painted or buy meat at the butchers its not all about price its a decision based on price and quality. Oh and guess what the final outcome on both these things i also dont get until they are finished. If I can apply this concept to basic things how come it does not work for funds.

  11. Whilst I acknowledge that charges are ‘fact’ and future performance is uncertain and therefore, as a result, the active vs. passive argument persists…. I would argue that a client would prefer a fund charging 2% p/a delivering 6% net of charges rather than 1% p/a delivering 4% net of charges.

    There are ample tracker and pseudo tracker funds available for those who want cheap. Add to that ETFs etc – there’s plenty of choice.

    You can get actively managed funds for perhaps 0.6-0.7% bps or so more.

    Yes, it would be good for the consumer if the charges for active funds fell but surely maintaining choice is more important than leaving everyone to choose between a range of passive solutions.

  12. Did he mean to say – “Speak first, think later”?

    RDR is a ‘catalyst’ only in the way of changing the choice of consumers to ‘No Choice’.

  13. Hot News

    The FIA have decided that the cheapest car wins. Hamilton has been signed for Trabant and Alsonso for Lada. Unfortunately Silverstone 2013 has no spectator bookings.

  14. As we who actually work in the industry with clients have always known for decades, especially since the PIA and then the FSA took over from Fimbra and Lautro, the last thing to be considered is the needs of the consumer / investor.

    A case of never mind the quality, feel the width.

    This barrow boy mentality is what will ruin the investment industry in the next few years and then where will the investors put their money?

    Exactly how do these people get their jobs, I suppose the answer to that, is that they are selected by a panel of people, whose own experience in the industry doesn’t amount to a can of beans and the candidates themselves have no interest in promoting the advice process, merely regulate the industry based on charges.

    Oh and how are they going to regulate and control our fee levels, even the Solicitors Regulatory Authority does not tell solicitors what to charge for their services.

    These edicts from these unknown pen pushers get worse the nearer we are to the cliff edge cut off date.

  15. Gobsmacked, do the regulators really understand what they are regulating. The Financial Services Industry contains businesses, not charities.If they don’t make a profit they pack up and go home which will reduce consumer choice. We already know that investment advice and on going advice is going to be a preserve of the high net worth individual. Advisers will not be able to look after anyone with less that £100,000. We only have to look at what the “Stakeholder” theory did to savings and pensions sectors. Making it cheap doesn’t work. Very few people stuck their hands up, frantic to invest in pensions or ISAs, just because they were cheap The population needs to accumulate long term savings as the country can’t afford the cradle to the grave system any more.Cutting costs means that advisers will be selective with whom they advise and those investors who have to go it alone because they are not profitable will be placing their future capital needs in a fund, not on the basis of the managers ability, his grasp of the market, his approach to long term investment, but on the fact it is cheap. Brilliant. Next step the £10,000 per annum head of the FCA, get some quality candidates for that job! but thinking about it they probably couldn’t do any worse.

  16. I remember a lot of what was said about RDR by the former head of the FSA but never did i hear of the RDR being a “catalyst for the industry to focus on the charges issue”. This is a new one on me. Interesting to see what his portfolio of invements would look like. If Wheatley is so intent on this why does he not make a great start and reduce regulatory cocst by 50%. I am sure the industry would follow with a reduction in fees as a gesture of good faith. He really is in cukoo land. He expects industry to be able to soak up higher and higher reg costs but not pass any of this on? Wise up and get real. This was your chance to do something really positve for the entire industry (and dare I say it consumers) and prove your worth to the highooffice to which you have been called. But hey ho it was not to be. It seems to be more of the same (but with another department to be created in the FCA) with even higher costs.

  17. This man is a fool.

    A dangerous and very powerful fool but a fool nonetheless.

  18. @ Tricia,

    I have to agree Tricia; Nothing he has uttered in the last few days would alter my view. All we need now is for him to start taking advice from those jokers in the Lib Dems! God help us…

  19. I was wondering whre I had heard this emphais on price before, Oh yes it was Mr Ron Sandler.

  20. I have said for some time that RDR for adviser’s is the Tesco moment. Meaning that adviser can and will force fund charges down like Tesco’s did to Farmers.

    After all it is adviser’s that control where investor’s invest money and I am sure that adviser will want the best deal for their clients! It will also help us keep clients and justify adviser fees if we are seen to look to actively question fund manager fees.

    I do not see that as a bad thing more like an opportunity for adviser’s who have their clients best interest at heart.

    My advice to other IFA’s is get over the commission dependence culture and you will be fine. To fund manager’s watch out because life will be changing for you as well.

  21. @Tricia

    Sorry I disagree!

    All that he has said is that fund manager’s need to justify there charges if the adviser or client is willing to invest at that management fee then they still can

    There is just no kick in increase commission terms to attract funds as some manager have been doing.

  22. “The truth is that asset managers can no longer distance themselves from the advice or sales process. Our view will be that the originators of products need to consider how they will distribute them as part of the design process.”

    I suspect that this is the crux of his comments; note “design process”, not launch of product. However a call to arms to reduce costs generally is no big deal and really does not merit much response since it is the blandest of statements. The suggestion that past performance plays too big a part in recommendations is nonsense. A fund where the likelihood of superior performance is strong will always be worth paying extra for; and the statistical evidence apparently is that a fund which produces top quartile performance in a single discrete year is more likely to achieve top quartile performance in the following discrete year than one that does not appear in the top quartile in the first year. Hence “past performance is not necessarily (note:necessarily) a guide to future performance. Maybe not but how many of us would recommend a fund that has fourth quartile performance for the last three or four years?

    And what about changes in fund manager and investment teams? A change in balance in multi asset and managed funds? An emphasis on charges is an untenable position

  23. @Peter Herd

    I completely agree with your first comment. Life is already becoming much tougher for fund managers and it is for advisers to drive their prices down. This is where we will bring value to our clients.

    The reason why I believe Mr W to be a fool is that I believe that this is and SHOULD be a market mechanism not yet another meddle from a meddlesome regulator that has ceased to regulate and is basically nationalising our businesses.

  24. So (low) costs are everything and (outstanding) track records count for nothing. Is that what Mr Wheately is saying?

  25. Dear Martin,
    As Mark Twain (I think) once said:
    Better to keep your mouth shut and let people think you are a fool, rather than open it and confirm it to the world.

  26. Incredible comment from a regulator. How little they understand. Surely the criterion is the return after charges, not the charges.
    I accept that future performance cannot be guaranteed. Hence the increase in UCIS investments. Not all perfect but many are innovative and attempting to provide real returns for investors.
    What is the FSA’s response. Effectively to ban them. Does anyone analyse the returns from the “Regulated” market.
    e.g. 67% of Pension funds, 73% of Life Funds and 47% of UTs and OEICS have delivered a 0% return over the last 5 years, where 0% = inflation.
    Is EVERYONE asleep out there or is it just the Regulator.

  27. So I should buy that out of date cheese with extra mold growing on it that previously gave me chronic tummy issues with a big warning on it saying this will give you a bad tummy because it was cheap. Compared to the nice cheddar with that looks like it would take great now and in the future. Cheap and no potential for future growth (or the squitts) is not worth the money.

  28. Using this logic, Mr Wheatly must drink Buckfast at the weekend, rather than a nice bottle of claret.

  29. I still don’t understand what all the fuss is about as though same funds with good past records can carry on charging what they like and if they’re so good then they will still attract money into them

    Like everything in life price is only relevant when the product being offered is of poor quality and therefore funds underperform will have to cut prices.

    By cutting the link between advice and fund management the client for the first time will have an understanding of the true cost of advice. Many in the IFA community see this as a negative but in reality this is an opportunity as the initial advice and ongoing servicing is where the client really sees value not fund manager who in the eyes of the consumer is overpaid champagne drinking individual that doesn’t take much of a hit when the fund underperforms.

    Instead of moaning about the changes may be our industry should look to concentrate on better client outcomes and look to evolve our services for their benefit.

  30. Heres a question for you Mr Wheatley ?

    Maybe the FSA/FCA should reduce fees and forget about performance ?

    How do you think that will help retain quality staff and reduce bad outcomes for the consumer ?

    No wonder this country is going to the dogs, if this how we view everything. And no wonder no-one wants to invest.

    What you get charged is not the be all and end all

    Lets see how long you would stick around if we reduced your salary to 25k a year ? I’d give it about 20 mins

  31. RegulatorSaurusRex 27th September 2012 at 11:58 am

    This Great White Hope has turned out to be a bit of a damp squib.

    I wish Wheatley was regulating the price of petrol, bread and milk, anything but financial services.

    Regulation is bust because the regulators are bonkers.

  32. Can you imagine a discussion with a client when reviewing their portfolio.

    Client. So why didnt you invest me in that fund that has been consistently outperforming its peers for a long period of time.
    Adviser. Well performance isnt everything according to the regulators so I put you in a nice cheap fund that has lost money but never mind it was cheap!
    Client. I think it is about time I found a new adviser.

  33. @ Peter Herd:
    Wonderful. IFAs are to be the Tesco’s of the business world! Yup, poor customer service, unsustainable relations with their suppliers (providers) and a sleazy reputation when it comes to their sharp practices. And, of course, sharp practices are MORE LIKELY when profit margiins are pared to the bone. The vast majority of IFAs – whether historically dependent on commission or fees – want to see their clients do well. This emphasis on cost rather than value, makes that result much more difficult.

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