In a study conducted by the Financial Conduct Authority (FCA) called – asset management market study, the regulator revealed that asset managers earned an average profit margin of 36% over a 6 year period, the second highest in the UK economy.
As a result, new rules that came into effect in September 2019 requiring UK funds to publish reports demonstrating how they provide value to investors called – annual Assessment of Value (AoV). The assessments are one part of a number of measures introduced by the FCA to ensure fund managers compete on the value they deliver, and act in the interests of the investors who entrust them with their savings.
How have the reports fared?
Analysis from The Times revealed that the assessments that came into force this year have resulted in over £30m worth of savings for investors as asset managers transferred hundreds of thousands of customers into cheaper versions of their products.
Beyond the money saved by investors, the reports have resulted in sweeping changes across major fund groups, including fees being sliced across products, as well as a number of high profile manager removals and funds being closed altogether following years of poor performance.
Despite this, there is an ongoing debate among industry participants and regulators about the current nature of the reports : Are AoVs working to their ideal stand and if not, what procedure can be put in place to ensure these reports are able to identify how funds are providing value?
One of the biggest issues for the value assessment report thus far has been the lack of industry uniformity. The FCA has not stated an official template for the reports, and has instead outlined a set of criteria that is non exhaustive – quality of service, performance, management costs, economies of scale, comparable market rates, services and classes of units.
Without an industry standard, a lot of firms have been very cavalier in the way they have produced these reports. Transparency and access to information is key, but many companies have made it impossible to locate their reports, often buried deep within their own website, while others have opted to provide the statement in the middle of an Annual report. There have also been issues with readability and coherence with many employing a narrative-heavy and unfriendly formatting approach.
The biggest issue area has been transparency for investors, as well as getting the information balance right, without overwhelming investors with financial jargon and numbers. The industry will be grappling with trying to find a suitable standard over the next few years.
While a strict template is unlikely, regulators can certainly help build an industry standard framework that avoids the pitfalls of assuming ‘one size fits all’ while being able to harmonise requirements across different types of funds.
The FCA has already indicated that it will be taking a close interest in how fund managers have compiled these reports – “We will work in the first half of 2020 to understand how effectively firms have undertaken value assessments. We will seek evidence of meaningful challenge on AFM boards on proposals made by the executive – including on costs, fees and product design,”.
AoV’s are a great tool for retail investors and there is a great opportunity for true active managers to demonstrate how they are adding value. There have been promising examples of firms embracing the challenge, while others need to restart the process, to ensure they do not get left behind.