Most Investors Do Not Get Value For Money!

At the end of 2016 we reported on the study that the Financial Conduct Authority (FCA) were carrying out into the Asset Management Market.

Why was this important?

Well, as the FCA stated:

“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 with over £1 trillion 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, as we said at the time, these funds are there to help people save for their future security. To these people this money is crucial!

Vital stuff then…

In the article above we used the title “Better Times Ahead for Investors?”

This was certainly a hope of ours, as one of the conclusions of the FCA study was:

“Authorised Fund Managers (AFM) of authorised funds generally do not robustly consider value for money for fund investors”.

So their aim was to insist on:

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

In fact it seemed to be recognised that one reason these managers do not put their investors first was that it was not appreciated that AFMs had an existing explicit obligation to do so in the first place!!

So how can the FCA introduce measures to make these firms improve, particularly as there is little evidence that they compete on price?

They have responded this year with various measures including proposing:

• Value for money rule (VFM). The fund manager will be required to assess whether they are indeed providing VFM
• The Chair of the board will be personally responsible and accountable for this
• Transparency on fees and charges, with an easy to understand all in charge

We hope they follow this up in 2018.

The study also reiterated that when it came to costs, the evidence is consistent that active fund managers do not provide VFM.

These funds boast that their manager will outperform the other managers in their sector.

But reading through the study, and looking at costs, once again a key area was the failure of active fund managers to deliver higher than average performance after costs.

A review published in 2016 by the FCA concluded that actively managed investments did not outperform their benchmark once costs were taken into account.

Peter Sleep, senior portfolio manager at Seven Investment Management, a UK wealth manager, said the analysis added to “an enormous body of well-researched evidence that indicates that active management is damaging to your financial wealth”.

The evidence is quite clear, and yet by far the majority of funds are still run by active managers!

The alternative, typically called passive or indexed investing, simply buys all the shares in a particular market, then holds these and keeps costs very low.

These passive funds are being used by the more discerning advisers, and Money Marketing (a trade journal) reported that it is expected that they will surpass active funds in 10 years.

As warren Buffet’s latest Investment Letter states:

“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.

Both large and small investors should stick with low-cost index funds…. When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

We don’t argue with that!!

Take Action

Who are your investments with?

Have you reviewed them?

Does the FCA report concern you?

Do you expect VFM?