What does the FCA have in mind for asset managers?
César Ritz is famous not only for the chain of hotels that bears his name but also for his slogan of “le client n’a jamais tort”, which effectively means “the client is always right”. Do asset managers also follow this mantra when it comes to providing what investors want?
This was the theme of a recent event hosted by the Financial Services Forum, where experts discussed the implications for asset managers of the Financial Conduct Authority’s (FCA’s) market study into the asset management sector.
Challenging the knowledge gap
Panellist Richard Withers – Vanguard’s head of government relations for Europe – said that “the FCA believes that investors don’t really understand what they are buying or what information they get from asset managers”; the regulator is keen to remedy this.
The panellists agreed that a lack of accessible information and understanding inhibits people from actively saving. However, increased communication does create challenges, according to panellist Chris Curtis (Manager – Research at Asset Risk Consultants). One is that asset managers may need to tread a fine line when it comes to balancing marketing and educating investors. Another is the general lack of financial awareness (especially on the part of retail investors). While the government needs to play a role here, asset managers can also do their bit by eschewing jargon, which can be baffling to outsiders, and instead “circulating material to clients in human language”, as Magnus Spence – the panel’s chair and the director of Spence Johnson – put it.
A further challenge for asset managers is that, due to the level of intermediation, most investors in funds feel disconnected from what is going on behind the scenes, according to panellist John Rowland, an executive director at Cicero. Increased engagement could help, especially when it comes to end investors.
If there is more engagement with investors in language they can understand, the industry can help to make investors more financially aware, which should go some way to making people more motivated, according to Withers. Asset managers can also break down people’s inertia by not being scared to justify the value for money they are providing to investors. Curtis stated that although most asset managers are providing value, they are not communicating it well.
Does the industry need to change the way it thinks?
As well as changing investors’ mindsets, asset managers also need to alter their own in some respects – when it comes to talking about costs, for instance.
Richard Withers believes that while asset managers are happy talking to investors about financial goals and diversification, they are more hesitant when it comes to talking of charges; most asset managers prefer to focus on past performance instead.
This was something the FCA’s market study brought out; Spence stated that the study had failed to pinpoint a clear relationship between product performance and charges, and that the information provided to clients (particularly end investors) about these factors lacked clarity.
This, said Curtis, is something asset managers should address by linking costs and performance when they talk to clients.
Withers stated that another way asset managers need to change their mindset is when it comes to selling products. Rather than focusing on promoting new launches and current fads, asset managers should encourage people to make the right decisions and save for the long term. Tech-based advice tools can help here, as can more communication from asset managers about product objectives. The experts present agreed that the FCA’s study showed the information currently provided by asset managers around product objectives was insufficient.
No more caveat emptor
Like Ritz, the FCA’s focus is on ensuring clients get the best outcomes. While falling prices have pushed asset managers with largely institutional client bases to focus on these outcomes rather than benchmark returns, retail-oriented asset managers have not experienced this phenomenon, according to Spence. Withers believes that MiFID II – which will come into force in January – should encourage asset managers to be more proactive on this front; the product governance requirements proposed under the new regulations mean that asset managers will need to ensure their products are suitable for the end investors intended.
Sociopolitical trends also reinforce the importance of client outcomes for asset managers. With an ageing population, more and more of the industry’s assets are likely to go towards funding people’s retirement. This is, and is likely to remain, a highly politicised subject, as regulators will be concerned about whether people are getting the investment outcomes they need, according to Rowland.
The findings from the market study are likely to feed into regulations, according to the panellists. While asset managers will have their hands full implementing these, they also need to stay one step ahead of the FCA.
Although the market study may be complete, Withers expressed the view that the FCA is still working on doing more to simplify things for end investors, particularly when it comes to costs. So this is all the more reason for asset managers to be more proactive about putting out information about costs and charges.
Being aware of what regulations could turn up in future means asset managers need to have awareness of macroeconomic trends, such as ageing and the industry’s growing assets – globally, these account for more than $85 trillion, according to Rowland. Asset managers also need to think about the industry’s social purpose because, as Curtis stated, “today’s best practice could be tomorrow’s regulation”.
The Financial Services Forum would like to thank Nandini Rao of Copylag for attending the event and completing the event summary. Please download the report and distribute it to your colleagues.