In August 2023 the FCA published their latest report¹ after visiting 14 Asset Fund Managers (AFMs) to review their Assessment of Value (AoV) processes. Introduced in 2019, the AoV was a response to a 2017 review which found that “evidence of weak demand-side pressure on fund prices, resulting in uncompetitive outcomes for investors in authorised funds”.

Although the FCA found many demonstrated a better understanding of the rules put in place, some AFMs were still falling short in their processes. Here we take a look at the main findings.

Performance

The issue of fund performance has become more visible both within the industry and to investors. We’ve seen consistent underperformance of some funds from some of the major asset managers, but what isn’t evident, is the reduction of fees and charges to align with poor performance. This is backed up by the FCA’s review where none of the 14 firms reduced their fees for poor performance when active funds underperformed against their benchmark.

AFMs need to evaluate performance and then decide if the fees they charge to investors correlate and demonstrate value for money, or if not, identify the challenges to improve fund performance and take the appropriate actions to show improvement. If AFMs can’t increase performance, they must consider if the product offering is right and if not implement changes to justify the fees they charge. If none of this is possible then reducing fees needs to be considered, or whether the product or fund remains on sale.

Fund assessments may have an impact on AFMs, as was the case with one firm last year, which announced a change to how it calculated value for money causing their share price to slide more than 15%. However, this shouldn’t prevent AFMs from doing what is necessary to achieve the right outcomes for investors.

Quality of Service

Value shouldn’t be defined and measured solely on fees vs performance. AFMs may charge higher fees compared to competitors with similar funds, whether they are underperforming or not, but they may offer better products and services to consumers. For example, an AFM who charges more may provide a portal with greater in-depth analytical information on their fund range to help guide investors in their decision making, justifying the higher fees and value for money. Measuring value should consider more than fund performance, it should include the customer journeys and level of service expected by investors.

Senior leaders in AFMs must make sure their firms have adequate processes in place to adhere to the AoV rules and demonstrate value for money. They must also make sure the appropriate governance, with clear metrics to measure performance, and oversight are implemented. There have been instances where AFM Boards, who oversee the AoV process, didn’t take full accountability for the fees charged on funds, telling the FCA they were determined by more senior committees. This is fine if those decision-making groups outside the AFM Board understand the responsibilities imposed by the regulator, but if not, they must take greater steps to make sure those groups are better informed.

Transparency

Investors rely on AFMs to provide good value for money and act in their best interests, which the AoV is designed to achieve, but failure to meet the regulations and not be transparent about the value provided through fees may lead to a lack of consumer confidence, discouraging investors from further investment or seeking alternatives who offer better value for money. Why would an existing investor remain with, or a potential new investor approach, an AFM if they’re charging unjustified high fees for poor performing funds and services which are inferior to their competitors?

We’ve seen questionable examples of AFMs not being as transparent as perhaps they should have been, including one instance where the share classes offered by the AFM weren’t the best available at the time.

By fostering transparency in the fees charged against fund performance and the services offered, taking greater accountability to ensure AoV processes are delivered, AFMs will benefit, but if they continue to fail, not only may they lose investments, but they’ll face the consequences from the regulator, who will know could impose fines or sanctions, leading to a greater loss of reputation.

Conclusion

Although it’s a challenging time for AFMs, especially with more scrutiny now Consumer Duty is in play, they must strive to deliver good value for money and fair outcomes to investors and demonstrate a transparent financial environment. Some are meeting the standards expected by the regulator, but others have work to do, to tighten their governance or provide more clarity around how they define value for money. AFMs need to conduct regular and rigorous assessments for AoV and take appropriate actions to address any shortcomings, like reducing fees or increasing performance, or further measures will be considered by the regulator. Could we see funds boycotted by investors or distributors if there’s no improvement? With the FCA expected to start revisiting AFMs in 2024 they must act now.

Look out for the final instalment in our Value for Consumers campaign, where Mike Penny explores how quality of service is key to delivering fair value.

References:

1. https://www.fca.org.uk/publications/multi-firm-reviews/authorised-fund-managers-assessments-fund-value-2023 

James Wood

Wealth Consultant