A few hours prior to Theresa May’s general election announcement on April 18th, the FCA published its Mission and Business Plan for 2017 and 2018. Given the surprise nature of May’s call to the polls, it’s unlikely that the FCA had timed this to be purposefully buried, but within these documents contained some potential bad news for the asset management industry. Primarily, the regulator’s Sector View on investment management largely re-iterated the findings in the interim Asset Management Market Study, suggesting that the fund management sector has found little traction with its lobbying to date, despite acknowledging consultation on the proposed remedies.
Furthermore, the FCA has used this opportunity to express additional concerns, although many of these had previously been telegraphed from within the depths of the interim AMMS report. The regulator is concerned that asset managers pay for unwanted custody services through bundled propositions and that low-margins result in lack of technological investment.(1) The regulator also raised concerns around a lack of transparency in the services that asset managers pay for, meaning that they (and therefore the underlying investor) are paying more than necessary and that there is a “failure to consistently monitor, assess and deliver on ‘best execution'”.
Fund managers also face further scrutiny around product design – too much focus on investment products that are easy to manage, or suit advisers, rather than meet end-investor needs (2). The FCA also raised the spectre of financial stability again around concerns that that a sizeable failure of one or more firms as end-investors attempt to redeem simultaneously. This they describe as a “disorderly wind-down”. For many asset management grandees, the pronouncements of the FCA over the last few years probably count as an “orderly wind-up”.
The FCA also announced a platform competition review to explore how ‘direct to consumer’ and intermediated investment platforms compete to win new and retain existing customers. But if the timing of this was obscured a little by Downing Street, the timing of the election may provide a little bit of respite for asset managers. It seems likely that the AMMS final study was slated for publication early June or late May. Given how keen the FCA is to promote change within the industry, it may well be that the regulator needs to adjust the timing by a few weeks (although doing so may also create a further risk if the election result brings with it a change in its mandate)
Change within the industry is happening, although at a pace slower than the most agitated reformers demand. Whilst the Standard Life Investments/Aberdeen tie-up does create potential to cut costs and diversify business strategy, the primary reason for the merger is all about distribution. Size and scale will increasingly be major factors in the evolution of the sector. Consolidation remains as inevitable as it always has been, but we should not be complacent about what that will look like. Since there are no really large ‘pure play’ passive managers – Vanguard, BlackRock, State Street et al all have chunky active businesses – why do there always have to be super-sized active-only asset managers? Many of the largest global managers, including Fidelity, have long had a foot in the passive camp, and many others have already shifted into “smart beta”. Therefore, for many “market cap passive” is a natural corollary – whether through organic or acquisitive growth – particularly where their business is driven by scale.
But active is alive and well and will continue to thrive wherever managers can add value – from equity income to systematic trend-following via illiquid assets, activism and unconstrained strategies, and so forth. Moreover, as passive becomes more prevalent in some markets, others will seek to exploit the anomalies that this creates, and so the two approaches will continue their symbiotic relationship.
Whatever strategies they follow and whatever products they provide, asset managers do need to become more “user-friendly” to survive – more inclusive, better communicators and more digitally savvy. This is not just at the retail end of the market. Institutional investors are increasingly digitally oriented, and not managing your online reputation – particularly your “search”, can be quite limiting for your capital raising ambitions. In terms of inclusivity, I’m reminded of the US research which showed that investors preferred mutual fund managers from a similar cultural background to themselves.(3) A major challenge to improving diversity is insuring that the groups that you want to appeal to understand what you do and what its value is, and the asset management sector is finding this the biggest hurdle to overcome.
Which brings us full circle. As a simple conduct regulator, the FCA is doing all that it can to ensure that the asset management sector is as fit for purpose as possible in its view. But it can’t make people invest in funds en masse. That requires an incentivised shift at a societal level, not a cultural level within one financial sector. That is well beyond the FCA’s current remit.
(1) According to the FCA margins in asset management are too high and margins in global custody would seem to be too low – so clearly they have a very fixed view of what would be ‘Goldilocks’ margins. I wonder what they are.
(2) The lack of reference to open-ended property funds at this juncture tells its own story.
(3) Kumar, A., A. Niessen-Ruenzi, and O. G. Spalt, 2015. What’s in a Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names, Review of Financial Studies 28, 2281-2321.
This article is part of our Spring 2017 newsletter.