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Watchdog presses ahead with 'all-in' fund fee plans

Financial Conduct Authority wants fund groups to charge investors an 'all-in' fee as it seeks to tackle 'weak' price competition.

Watchdog presses ahead with 'all-in' fund fee plans
City watchdog the Financial Conduct Authority (FCA) is pressing ahead with plans to force asset managers to charge investors an ‘all-in’ fund fee, as it seeks to tackle ‘weak’ price competition.
Currently, funds disclose an ongoing charges figure (OCF), which includes the fund management fee as well as costs related to fund administration, custody, auditing and regulation.
But the OCF is only an estimate, and the actual charge levied on investors can differ. It also doesn’t include ‘explicit’ costs such as the tax and commission incurred by buying and selling shares, or ‘implicit’ charges such as the bid-offer spread on these transactions.
The FCA wants the OCF to become the actual charge, with fund managers providing investors with an estimate of the impact of additional explicit and implicit costs.

Performance fees under fire

The watchdog also took aim at performance fees, particularly when used by absolute return funds.
It said some funds were charging performance fees even when they delivered returns ‘below the most ambitious target they hold out for investors’, while in other cases, performance fees were being triggered by returns before the impact of ongoing charges.
The regulator is considering strengthening its rules so that performance fees could only be triggered by a fund surpassing its most ambitious target after the impact of ongoing fees.

Commission scrutiny

The FCA's study also found some investors were paying more because they were invested in funds that still paid commission to financial advisers.
Commission was banned under the retail distribution review, which came into force more than four years ago, but advisers are still allowed to receive commission on funds sold to clients before then.
The FCA said 21 asset management firms it surveyed had paid out a combined £1.4 billion in financial adviser commission in 2014. The watchdog said it would look into turning off these commission payments.

'Box profits' ban

Dual-priced funds, which carry a spread between the ‘buy’ and ‘sell’ price, have also come under scrutiny. The FCA is consulting on a ban on fund managers making any profit on this spread, a practice known as ‘box profits’.
Although many fund managers now operate a single pricing approach, where investors who buy and sell the fund get the same price, there are some exceptions.
Numis analyst David McCann pointed to Liontrust (LIO) as ‘the only listed asset manager that we are aware of under our coverage that currently continues to earn box profits / has not already announced and quantified plans to remove them’.
Jupiter Fund Management (JUP) last year announced it would lose £13 million in box profits by moving from dual to single pricing on its funds.
The FCA's scrutiny of asset managers hasn't encompassed fund platforms, but the regulator already announced earlier this year it would be looking into competition into the sector.
The regulator said today this work would also examine 'vertically integrated' firms, which provide financial advice on their own funds, after responses to fund management study raised concerns about possible conflicts of interest.

Stronger governance needed

The FCA is also looking to strengthen the governance of funds, by requiring a minimum of two independent directors sit on their boards.
Unlike investment trusts, which feature boards independent of the fund management group which runs them, governance of open-ended funds is typically carried out in-house by the fund group.
Investment consultants are also in the FCA’s sights. The regulator is proposing to ask the Competition and Markets Authority to investigate the sector, and wants consultants to come under its regulatory remit.
The FCA rejected a bid by consultants Aon Hewitt, Mercer and Willis Towers Watson to stave off this probe with the promise to disclose charges and performance in a standardised format.

6 comments so far. Why not have your say?


Jun 28, 2017 at 12:41

The investment management industry has grown fat over the years gorging itself on other people's money, but I'm not convinced that regulating performance fees in the manner described will help all that much. Wouldn't scrapping the flat-rate fee levied irrespective of a fund's performance and instead moving to a performance fee only basis (like Woodford's Patient Capital) serve better to concentrate the minds of the fund managers?

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Jun 28, 2017 at 12:58

The main factor for me is performance after costs, I couldn't care less if the fund company charged 1, 2 or 3% provided the fund performance justifies the charges. The FCA will simply steer folk to the cheapest, not necessarily the best for that investor.

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Careful Man

Jun 28, 2017 at 15:43

Transparency is all we ask for

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Jun 28, 2017 at 16:45

As usual FCA is going to go nowhere pussyfooting like that and at best it will take 5 years to make fund companies disclose all their charges, another 5 years to stop the commissions which it was supposed to have stopped, etc, ad infinitum.

Me? I am going to invest in Jupiter and Schroder shares so that I become one of the exploiters rather than one of the underclass begging for justice.

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Jul 01, 2017 at 12:31

All funds have a target EXCESS return - otherwise they would not be able to tempt investors away from passive benchmarks.

All funds take risk to garner this excess return - that is risk in excess of a benchmark.

For equity funds the risk taken relative to a benchmark is roughly twice that of the excess return. That is, a fund that targets an extra 1% above its benchmark AFTER FEES, will gamble with 1% plus fees (typically 0.5%) 3% (t1% + 0.5%) of the value of investments to try and achieve that (paltry?) extra 1%.

Now, if a fund manager does not meet its target return (of 1% net of fees)benchmark, what does the fund manager lose? Answer - nothing. The fund manager wins even when the investor loses.

So, should you be satisfied if a fund manager even matches the index, net of fees? Answer - no. You have been promised a fast car and risky driving to beat the slow car with safe driving and the car has not done so. You have paid for a dud.

At least half of fund managers fees need to be clawed back and repaid to investors for underperformance OF THE TARGET EXTRA RETURN over a reasonable (rolling 3-5 year) period.

Additionally, if fund managers takes more risk than is consistent with the target extra return, the fund manager needs to be penalised. This penalty should equal half of the extra risk - so if the manqer risks 8% of the fund to achieve a 1% return after fees - relative to the relevant high or low risk index - a penalty of 4% of the value of investments over a reasonable (rolluing 3-5 year) period.

It should go without saying that performance fees are only payable after ALL costs (hey look, I made an exrra 2% over my target return - yes, but it cost you 1% to do it).

What should be clear is that a reasoable (rolling 3-5 year) period is required AND A HIGH WATER MARK - to repay past performance.

Some hedge funds perfromance fees begin at zero return or a return lined to the risk free rate (of close to zero). This is ludicrous. Some do not have high water marks, so take half the profits when positive and take the 2% flat fees, when they are negative (2 and 20% anyone?).

Again, the investor should be very clear about the target return that is being sought AND the risks that the fund manager will take to achieve it, Do you want a manager that stands a good chance of making an extra 1% after fees with 3% risk, or one that has 8% risk (the higher the risk, the wider the range of possible uner or outperformance. The investor can then evaluate the managers success in crystallizing the extra risk taken - that is THE QUALITY OF THE FUND MANAGER.

a high quality fund manager should command a higher fee (and income to the manager) - a low quality fund manager should rebate fees taken and get out of the industry.

A good measure of quality is the (adjusted) Sharpe ratio/Information ratio which measures the extra return garnered per extra unit of risk. Active managers can usually only get a ratio of around 0.3-0.5 AFTER FEES, meaning that you will be able to get an extra 1% return above a relevant benchmark with 3% of the funds value in extra risk relative to the relevant benchmark.

Me? I run my own portfolio with a dividend orientation that covers my bills. It costs me 200 pounds a year ALL UP. - as luck would have it, it has achieved my objective, has the same risk as a passive FTAS index and has 8 holdings.

Happy hunting!

Happy hunting!

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Mark Stringer

Jul 02, 2017 at 11:14

It's the same old song. They just move the chairs round a bit. It's all a rip off for " long term investment" cowboys, share trading,fund managers, tipsters.....

What's a long term investment? A short term one that's gone wrong!

There is one sure thing about who always get paid regardless of performance.

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