- Value for Money is one of the outcomes from the FCA’s Asset Management Market Study. It puts an onus on fund managers to assess each of their funds and share classes against 7 criteria, on an annual basis, on which “value for money” can be judged. There is also a responsibility for this under SMCR, where an accountable individual will have responsibility for Value For Money.
- The FCA have been criticised for heavily weighting the Value for Money criteria against costs (4 of the 7 criteria relate to costs, though this was improved from 6 out of 7 after criticism in the initial consultation). The assessment is also a substantial activity and costly to do – and not prescriptive enough to provide a mechanism to compare funds directly against each other. Nevertheless, participants deemed it to be a good thing in principle, and asset managers should be doing this anyway.
- The recent fine of Janus Henderson was a case in point – where active funds were found to be “closet tracking”, but charging clients for active management, and it was thought that this will be prevented under the new regime.
- The conversation turned to the effect on the industry from a distribution point of view – i.e. what effect will this have on wealth managers and private banks?
- Participants did not believe that the asset management industry was providing poor value for money in general, despite the fact that post RDR, when the cost to the end investor increased (asset managers’ increased their share of fees, and increased costs due to VAT on explicitly charged advice fees). However, most participants agreed that the combination of these new criteria and MiFID II transparency provide additional data to the buyer/client which will facilitate an informed decision.
- One participant thought that distributors have failed in not pushing prices down before now.
- One view was that these criteria will spark the discussion on value for money and distributor firms (private client managers and advisers) will go further in terms of due diligence, improved service and value they add to fund selection etc.
- Apart from the fact that the FCA have made the new criteria unnecessarily complex and costly, the participants agreed on several other issues with the criteria. You could produce all this information and then the investor (or even IFA) won’t read/understand it. The Woodford case is an example where many IFAs and investors admitted they had not read the prospectus when asked in private. The extra information could also confuse investors and the asset managers need to communicate the information in a meaningful way.
- One participant’s view was that if a fund was found not to be providing value for money then removing ‘20bps’ was unlikely to improve value – agreeing that focus was too much on price/cost. In addition, fund managers will be assessing their own abilities and will therefore be subject to bias. No solutions were suggested, but asset managers are free to add relevant information to the assessment.
- Another participant wondered whether any asset managers might take an initiative to create an alignment of interests between the fund managers and their clients, e.g. a ‘no performance no fee’ policy. The asset manager in the room did not take that one on….
What is likely to happen next?
- No doubt some additional transparency will put pressure on asset managers to show how they add value, but the Regulator’s criteria won’t give the whole story for a wealth manager’s selection processes. As product becomes commoditised but service isn’t, value at product level may be considered less important than the service given by advisers, wealth managers and platforms.
- Additional transparency adds another bent to the due diligence procedures for manager selection, but as an increased burden for platforms, advisers and wealth managers (or what should have been done anyway), rather than deemed as additional value an investor will pay for.
- The criteria are purposely less restrictive than Mifid II cost transparency so that there is scope for fund managers to provide additional, useful information to their clients - however this means more subjectivity and less alignment between assessments from different managers – hence it will be more difficult to quantify and compare like for like.
- Participants did not see VFM as a game-changer, but did agree that there may be more competition between funds as a result.
- Smaller funds may suffer in VFM comparisons due to not being able to leverage cost efficiencies from suppliers in the same way that larger ones can.
Expert: Andy Peterkin, Partner, Farrer & Co
Facilitator: Gilly Green, Managing Partner, Sionic