FCA Asset Management Review: Great news for investors
07 March 2017 | Topical insights
Commentary by Richard Withers, head of government relations for Vanguard in Europe.
Our initial thoughts on the FCA's Asset Management Market Study
The Financial Conduct Authority (FCA), which regulates the financial services industry in the United Kingdom, published its interim Asset Management Market Study last November. Running to some 208 pages, the report represents the most detailed regulatory examination of the UK's asset management industry for many years. It's an interesting read and contains a number of criticisms of the industry.
The FCA gave asset management companies until February to respond. Vanguard submitted a detailed response, covering a variety of topics. I'll highlight three of them here.
1. Costs are too high
We agree with the FCA that the cost of investing in the UK is too high. Like many industries, fund management benefits from economies of scale. That is to say, a £1 billion fund is not necessarily ten times as expensive to run as a £100 million fund. At Vanguard, our whole business model is built on this principle. We offer high-quality, low-cost funds, which deliver good results to investors, helping us to attract and retain assets, which give us economies of scale, so that we can lower the cost of investing further, and so on.
However, the rest of the industry doesn't operate on the same model. Competition has started to drive fund charges lower, but the industry needs to do more. We believe that lowering the cost and complexity of investing is the best way to improve the long-term financial health of the UK population.
2. Performance is not good enough
Every pound that investors pay in charges is a pound out of their potential returns. Hence, high costs act as a brake on fund performance and — counter-intuitively for many — lower-cost funds tend to outperform their higher-cost peers.
Across the industry, too many funds fail to live up to their performance targets, partly as a result of the charges that they levy. Moreover, even those managers who do manage to outperform in a given year seldom manage to repeat the feat consistently.
Since passive investing has started to become more popular, there has been an ongoing "active vs. passive" debate. We think this debate is outdated and should be reframed as high cost vs. low cost. Why? Because research has consistently shown cost to be the best predictor of relative returns.
In fact, we've gone as far as suggesting that all funds should carry a health warning along these lines: Warning – Check how much you are paying – High fees will harm your long-term returns. We'd also like to work with the FCA in designing a rating system to make it easier for investors to understand the relative cost of a fund. Red/amber/green rating badges seem to work well in other industries.
3. Investors need better information
To make informed decisions, investors need to have access to information they can understand. However, research we've recently conducted with Opinium LLP showed that investors don't feel they have access to clear information. As a result, many investors still base their investment decisions on past performance, which has been shown to be a poor predictor of future success.
Rather than focusing on past performance, we believe that investors will improve their chances of success if they are encouraged to think about the return they require in order to meet their goals. Selecting a low-cost fund designed to produce their required return, and then having the discipline to tune out short-term noise, will further improve their chances.
Aligned with the FCA
In summary, we agree with much of what the FCA says. Consumers will benefit from having access to better products with lower charges, and clearer information that allows them to make informed investment decisions. If the industry is truly customer-focused it will prioritise achieving progress on these fronts. We look forward to continuing to engage with the regulator and our peers on the topic.
Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.VAM-2017-02-24-4390