The Financial Services Consumer Panel, a group that advises the UK regulator on policy, delivered a shock to the asset management industry last month by issuing an unfavorable report on the situation of the fund market. The Panel boldly criticized the market as an industry in which there is a systemic program of misaligned incentives and one that can exploit consumer behavior without being challenged. The report continued by saying that the industry lacks cost transparency and the way competition works in the interest does not benefit consumers.
Although the solution is outlined in the report, there has been much debate about whether or not the proposal is actually something that would work in practice. The Chief Executive of Aberdeen Asset Management (Europe’s largest listed fund house), Martin Gilbert says that the solution is a good one. He believes that the sooner the industry moves to this transparency, the better it will be for all parties involved. In fact, Gilbert has already begun making the changes for Aberdeen’s Luxembourg fund range and will continue into the UK fund range at the beginning of 2015.
While Gilbert may think the change is a good idea, others disagree. The UK trade body, Investment Management Association, reached out to the chief executive for his thoughts on the proposed change. Daniel Godfrey believes that by making the fund house responsible for unanticipated costs will create a conflict of interest which will harm the investors. Godfrey says the conflict of interest comes in when a trade will improve the fund performance, but knowing that it will cost to do so, managers may not make the trade. To be successful, he says that managers should be totally uninhibited when it comes to making buy and sell decisions.
Godfrey is not alone in that sentiment. Former head of official institutions at State Street Global Advisors, John Nugee, agrees with the possibility that trades made lessen or stop because of the cost to the company. But, Miller dismisses such claims as false and says that she believes if a trade, regardless of cost, would improve performance and the fund size, then managers should have an incentive to make the deal.
Some fund managers have argued that this solution will not work because transaction costs are difficult to predict. However, Miller dismisses that argument saying that it’s easier to smooth volatile costs than it is to pretend the costs don’t exist.
While some fund managers have been outspoken on their beliefs, others have remained neutral. The UK’s second-largest fund house, Schroders, says they are aware of the report and will take the findings into careful consideration. Fidelity Worldwide Investment says that they support the direction FCA is heading and are in favor of IMA developing a way forwarded for clearing prices. Perhaps the most inoffensive comment from a fund house comes from US passive fund house Vanguard who says it believes investors should be able to make informed decisions and that it’s important that they receive clear and accurate information about fund expenses.