“Perverse investment consulting industry condemned” – the FCA responds!
This was the headline in the FT’s fund management supplement in November 2015. It coincided with the FCA (Financial Conduct Authority) announcement that it would conduct a study into competition in the asset management industry. In response to an outcry about the lack of oversight of fiduciary managers (consultants who peddle their own asset management services) the FCA added:
- what effect investment consultants have on competition for asset management services
to its initial remit i.e. to consider:
- how asset managers deliver value and
- whether asset managers are motivated and able to control costs along the chain value.
Two weeks ago the FCA published its interim report. It’s a c200 page document and we have chosen to focus on four key conclusions.
1.Passive management serves investors better on average than active management
Our view: most probably it does! If you stay with the same active manager forever and pay high fees then you might struggle to beat the index. But, by actively trading managers and rotating styles as well as stocks, you can do better. If you had the best managers over every three or even five years then you would probably leave the index for dead, net of fees. Quantum can’t guarantee that. But we do think about it a lot!
2. Active managers’ fees are too high
Our view: anyone who has had dinner with a fund manager will know that this is true. Lack of transparency is an issue but the Club mentality is worse. Why can’t every active manager drop fees by at least 10 basis points (probably much more) and still have a comfortable life? At every opportunity, we try to squeeze managers to see how keen they really are for our business.
3. Fund objectives are opaque
Our view: they shouldn’t be. We must understand things like target return, likely volatility, market sensitivity and black swan resilience before putting funds into our asset class building blocks.
4. Fiduciary managers lack integrity
This is clearly not true. They have a lot to offer, not least in terms of efficient and effective implementation. Furthermore, an asset manager who understands liabilities is a useful person to know. But would you ask an architect to build your new house? Or would you ask your builder to design it? The need for independent oversight is clear. Solutions that marry agility, conflict management and value are close to our hearts.
While the FCA report makes some good points, let’s not throw the baby out with the bathwater. Responses are sought by 20 February 2017. If you would like to feed into our response then please email us via quip@quantumadvisory.co.uk