Better Times Ahead For Investors? (Financial Conduct Authority Asset Management Market Study)

We have written many articles over the years on how to invest sensibly.

After all, it is one of the most important issues for our clients saving for retirement.

As Financial Planners we will of course ask ‘what is the purpose of money’ for you? You don’t just put a few hundred thousand pounds under the mattress and then sit in your chair for 30 years.

But we are happy to revisit investment here because the Financial Conduct Authority, the body responsible for looking after your interests, have just issued an Interim Report entitled:

“Asset Management Market Study”

Such reports can be dreary reading, and you will be pleased to hear we will spare you the full 200 pages!

However, and I think for the first time, we are encouraged by the tone and findings of this FCA document.

Why?

Well, let’s see.

The report starts with some background:

“The asset management industry plays a vital role in the UK’s economy. Asset managers manage the savings and pensions of millions of people, making decisions for them that will affect their financial well-being.

The UK’s asset management industry is the second largest in the world, managing £6.9 trillion of assets. Over £1 trillion is managed for UK retail (individual) investors and £3 trillion on behalf of UK pension funds and other institutional investors.

There are around 11 million savers with investment products such as stocks and shares ISAs. These investors are willing to put their money at risk to generate greater returns than they can get through cash savings.”

So, it’s a massively important subject – ok we get it. In that case, how are the 1,840 asset managers that you can choose from, actually doing?

The FCA comments that:

Active Funds

“77% of fund managers choose to be active. That is they believe they can buy and sell stocks more effectively than the next manager, and so aim to beat the market and make you more money.

Actively managed funds typically charge higher fees than tracker / low cost funds, reflecting the higher costs of managing an actively managed fund.”

Tracker / Low Cost Funds

“Tracker / low cost funds usually offer investors similar levels of risk and return as the market”.

We would add that they usually rely largely on a buy and hold strategy.

They then also comment that tracker / low cost funds are also far less expensive, and as costs are a big drag on performance, this is crucial.

“Since 2005 passive funds (tracker / low cost funds) have experienced nearly fivefold growth and now represent around 23% of the assets under management in the UK.”

In addition, a recent article in Money Marketing states:

“As scrutiny over poorly actively managed funds continues, the consultancy firm says in the next five years 43 per cent of the industry’s new assets will fuel passive managed strategies.”

The FCA continues:

“Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs.

Funds which are available to retail investors underperform their benchmarks after costs.

Investors may choose to invest in funds with higher charges in the expectation of achieving higher future returns.

However, we find that there is no clear relationship between price and performance – the most expensive funds do not appear to perform better than other funds before or after costs.”

This is the first time we have heard this fact put so succinctly and bluntly by a government body charged with looking after you, the investor.

Fantastic!

We have been helping to educate dentists and doctors for over a decade now on these very points.

We felt for a long time that we were swimming against the tide, with the many various vested interests shouting louder and longer.

We’ve written about an appalling development concerning The Investment Association (IA) which represents UK investment managers.

They wanted to make everything transparent with how companies charge you, and sign up to a code of conduct.

Sounds good.

Well, several companies then threatened to leave the IA!

The conclusion is damning.

These companies object to transparency & are putting their interests ahead of their clients!!

The FCA also comments on:

“Factors that drive investor choice:

The investor community is a diverse mix of individuals and institutions. However, we found broad agreement that value for money for asset management products is seen as a combination of the:

• Return achieved – most investors generally think of value for money as risk-adjusted net returns
• Price paid
• Quality of any additional services provided by the asset manager”

Spot on!

That is why we advise as we do:

• Find out how much risk you really need to take to achieve your goals in life and over how long
• Find the best value investment process
• Provide full comprehensive financial planning to give you peace of mind

The FCA are to consult and comment by summer 2017 with various aims including:

“A strengthened duty on asset managers to act in the best interests of investors”

Well that would be good!

We’ll keep you informed.

If you have investments or pensions then we cannot stress enough how important it is to ensure you have the right portfolio.

Particularly if you are with a bank, even if it has a posh name!

To date, we have never come across a scenario where we couldn’t improve a dentist or doctor’s approach to investing and managing their capital, as well as saving them money.

Take Action

Who are your investments with?

Have you reviewed them?

Does the FCA & IA reports concern you?

If so, then let contact us and we can offer you a confidential chat with us where we’ll give you a suggested course of action (there’s no charge for this and definitely no obligation).