FCA proposes ‘all-in fund fee’ after scathing review of active management.. so why the soap?

Today I read an article by James Phillips in the new Model Adviser dated 16/11/16 which I found of great interest. I would therefore like to share it with you, but before I do, let me share my views on the subject.

My view is that the FCA should not be trying to restrict what these wealth management firms charge because we will end up with a grey economy. However, I do believe that they should be able to enforce these companies to declare all the fees and charges associated with their investment service and be forced to deduct this amount from their gross investment returns that they quote.

For years I have been an advocate of low fee investing and I have personally witnessed wealth management companies taking or planning to take tens and hundreds of thousands and even millions of pounds, out of a clients portfolio over their lifetime. Its happening everyday, it may even be happening to you. This is of course  legal and the client has agreed to pay these fees, but I wonder if their clients actually understand what the impact of these costs means to them personally and the drag these excessive fees have on their long term future wealth.

In my book ‘Retire Faster’ available on Amazon, I write that I have witnessed one wealth management Bank had written in the depth of their report to a client, that ‘they’ have discounted using simpler, low cost investment strategies, as ‘they’ felt the additional peace of mind offered by their professional relationship manager is worth the investment charges involved. Why not ask the client what he wanted? The cost of this additional peace of mind to this client was in excess of £2.5million over his lifetime.
•Why does having a relationship manager cost this much money?
•Why couldn’t the client have simpler low costs funds and a relationship manager as they are not connected?
•Did the Bank advise the client how much their decision would cost him, and then ask for his views?

Of course not!!

Wealth management companies are in business to maximise their profits and the expectation that they act in their clients best interest is not aligned with the clients expectations. Due to changes in technology over the last decade, investors have access to global risk rated portfolios at a fraction of the cost of active fund managers. However, do not expect your wealth manager to inform you that you could be more financially efficient at their expense, why would they?

This is where the thin blue line of expectation is drawn. The client expects that they are receiving the very best advice to maximise their long term wealth. However, in the real world the financial services industry is not going to tell you that a more cost effective option exists elsewhere and is available to all investors.

Active fund managers will scream and shout about how their expertise adds value. If clients feel that paying someone excessive amounts of money to make a prediction or in other words, gamble with your money, then that’s their choice. But less us look at a simple example.

Every piece of information about a stock is now available to all interested parties around the world. Every transaction is analyised by clever professional fund managers and technical analysts. The price of the stock is set by the combined knowledge of all these interested parties around the world. That’s what makes a market. Why would you think that this salaried employee of your wealth management company has information that the rest of the world does not know. But you give them your money and pay them to gamble whether that stock will go up or down. Your money is like a bar of soap. The more you touch it (buying and selling costs) the smaller it gets.

Let us assume that the market returns 5% every year and your active fund manager can add a positive 20% extra return every year. This is one of the good ones. They charge 2.5% in total costs which is the industry average according to a major wealth management firm. The net investment return on your money is 6% – 2.5% = 3.5%.

Let us assume that you invest in market tracker funds at 1% fees. The market returns 5% less the 1% fee and your net investment return is 4%. Compounding over your lifetime which fund is going to give you a better return?

On top of that your active fund manager has to take additional risks with your money to get a better then average return or as the data in my book shows, over many years less then 20% of active fund managers can beat the market consistently over the longer term, so this will also effect the drag on your returns. Check out my short video by using this link to see the full effect this will have on you personally.

http://www.goldsmithfs.co.uk/lifestyle/

Financial decisions that you have made in the past have bought you to this moment in time. Financial decisions that you make from today, will lead you to your future lifestyle… choose wisely.

But don’t take my word for it, check out the FCA article below. Unless we can get the Industry to change the way that financial services are delivered to the retail investor, investors will continue to burn money. So the engagement of the FCA to enforce full management charges is a welcome first step.

Perhaps the second step is for you to identify exactly how much you are paying in fees, relate my video link to your current financial situation, assimilate and apply the advice I offer in my book, then I promise you can have a financially efficient and transparent investment experience.

Why not seek a second opinion to get an unbiased view, after all it is your money.

 

 

The following article is by James Phillips of the new Model Adviser dated 16/11/16.

The Financial Conduct Authority (FCA) said actively managed funds do not outperform their benchmarks after charges and both funds’ investment objectives and fee breakdowns are unclear to investors.

The regulator is to introduce a new all-in fee and require asset managers to enhance their reporting of a fund’s benchmark and performance against it, it said in its interim report on its asset management market study, released this morning.

The FCA said it will also make it easier for investors to switch from more expensive legacy share classes to newer cheaper ones.

In a scathing overview of active fund management, the regulator said: ‘Our evidence suggests that actively managed investments do not outperform their benchmarks after costs and that some active funds offer similar exposure to passive funds, but charge significantly more.

‘Some investors are unlikely to ever drive value for money effectively and therefore need strong governance to act on their behalf. Currently this does not appear to be happening, contributing to limited price competition for actively managed funds, asset managers being less effective at controlling more complex costs and specific funds not clearly communicating their investment strategy to investors.

‘This results in investors choosing funds that are unlikely to meet their expectations.’

The FCA’s study looked at 722 funds from 15 asset managers, representing £563 billion of retail assets. It found that on average, active funds charged an annual management fee of 0.9%, compared to 0.15% for their passive counterparts.

It said it wants to move to a US model for fund governance, ensuring ‘asset managers are held to account for how they deliver value for money’. This also includes looking at whether tiered fee arrangements for different asset levels share economies of scale effectively and making public contract renegotiations to document whether the fund is delivering value for money.

The all-in fee

The FCA said that it found some charges, such as transaction costs, are not disclosed to investors, or are estimated in advance, so risk being inaccurate. It added this is ‘likely to contribute to limited price competition for actively managed funds and asset managers being less effective at controlling complex costs’.

The regulator suggested four possible ways in which the all-in fee could be implemented. The first is that the current ongoing charges figure (OCF) becomes the actual charge taken from the fund with the fund manager making up any shortfall, for example around transaction costs and dealing commissions. ‘This option would require the least change from the current way of deducting charges,’ the FCA said.

A second option would be similar, with the OCF becoming the actual charge, but with the fund manager estimating transaction costs. The third route would be for a single charge including all transaction costs, but with an option for ‘overspend’ if additional trading is deemed necessary.

The fourth would be a single charge with no overspend option, so the asset manager would have to fund any difference between the forecast and actual trading costs.

‘Using the AMC as the headline charge figure on marketing material does not provide investors with a clear, combined figure for charges as it excludes additional charges and expenses that are taken from funds,’ the FCA said.

‘Additional ongoing charges can add significant amounts to the cost of a fund and we saw some small funds with charges of up to 0.9% in addition to the AMC. Using the AMC could therefore result in retail investors finding it difficult to accurately compare charges and potentially underestimating the cost of some funds.

‘Our overall policy package will bring together a consistent and coherent framework of interventions which will increase the transparency of costs so that those seeking information can get it. It will also provide greater clarity of fund objectives and performance reporting and protections for investors. When we develop this package, we will take account of the outcomes of our consultation on transaction cost disclosure to pension schemes and independent governance committees.’

The FCA is to carry out a further round of consultation before releasing its final findings next year.

http://www.goldsmithfs.co.uk/lifestyle/

Share This: