What caught my eye this week.
Consumer Duty has been hailed by some as the biggest overhaul of financial services in 30 years. But to this jaded inexpert outsider – and skim-reader – it has mostly come across as either stuff you’d think a regulator would be regulating already, or else an open-ended mandate to change the playing field as it goes along.
However this story in the Financial Times this week was pretty notable:
The UK Financial Conduct Authority has ordered asset managers to justify the fees charged on their funds, adding to the pressure firms are already facing from the rising popularity of cheap passive trackers.
The regulator on Thursday said a review of authorised fund managers showed that tensions between profitability concerns and assessments of funds’ value for money were influencing how much to charge clients.
The rise of passive investing in recent years has spurred competition within the industry, forcing some funds to reduce their fees and sparking a wave of consolidations as asset managers battle to cut costs to maintain their margins.
However, despite the reduction, the regulator has sought to reform the way fees are calculated, arguing that some asset managers are still failing to provide good value for clients facing high charges.
Active fund managers having to prove their funds are worth the money?
I imagine the industry has already drafted its initial reaction:
Given that all but the most incurious investors know there’s now abundant evidence that the majority of retail funds underperform their benchmarks, you almost wonder what the FCA is thinking here.
Does it want to blow up the golden goose that funds it?
If the regulator was just going after fund marketing, then perhaps the active fund industry would have a chance.
A start-up index fund manager used to tell me it was hard to compete with actives via advertising because he wasn’t allowed to cite positive performance comparisons in marketing. I have no idea if it was that simple. But certainly I noticed afterwards that active fund adverts focussed more on ships sailing over choppy waters or cartoons of Victorian-style adventurers hunting profits in the jungle than on citing any market-beating statistics. For obvious reasons, in the majority of cases, you’d have to think.
In any event, the FT headline reads: “FCA tells UK asset managers to prove they offer value for money”.
And this, frankly, seems an insurmountable challenge, on an industry-wide basis.
I’m not saying fund managers are evil or that beating the market at a portfolio level is all-important for every investor or that no active fund has ever outperformed for decades.
None of that is true.
But it’s a stone-cold fact that most active funds lag their passive equivalents, over the long-term.
So on the face of it, fund managers are just not going to be able to prove that most funds ‘offer value for money’. At least not whenever there’s a cheaper index fund equivalent available.
Hence, as characters used to say in 1990s sitcoms to make sure you noticed a plot twist …
…this should be interesting.
It’d be good to hear from any readers – or industry insiders – who’ve delved deeply into the Consumer Duty standard in the comments below.
Have a great weekend!
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Four of Britain’s biggest lenders cut rates on fixed mortgage deals… – Guardian
…then two more follow the next day [Price war?] – Guardian
Survey finds top earners postponing retirement after pension changes – This Is Money
Retailer Wilko has gone into administration – Which
PayPal launches PYUSD stablecoin backed by the US dollar – The Verge
China’s economy has tipped into deflation – Semafor
Study: housing costs make households in UK much poorer than in US – Guardian
The all-important US consumer is sitting on a ton of home equity – Tker
Products and services
Recognise Bank launches Best Buy two-year savings fix paying 6.1% – This Is Money
Premium Bond prize rate boosted to 4.65%; other NS&I rates rise too – Which
Open a SIPP with Interactive Investor and claim £100 to £3,000 in cashback. Terms apply – Interactive Investor
Disney+ price changes: will you pay more? – Be Clever With Your Cash
That ‘ultimate mystery’ holiday is unlikely to deliver Barbados for £99 – This Is Money
Newly renovated homes, in pictures – Guardian
Comment and opinion
Is a market cap index easy or hard to beat? – Behavioural Investment
What can we learn from Britain’s £11m pension saver? [Search result] – FT
Why the secretly rich need to create a ‘trust fund job’ – Financial Samurai
Wealth versus income… – Rational Walk
…and portfolios versus paycheques – Of Dollars and Data
Even when the market goes up it still goes down – A Wealth of Common Sense
Are AUM fees headed for extinction? – Investment News
Lump sum – Indeedably
The performance impact of making predictions – Klement on Investing
Coordination when retirement is for two – Humble Dollar
Finding your ‘enough’ [Podcast] – Morningstar
Space telescopes and investing failure points – Validea
Bad news on the brain: how we’re wired for pessimism – Fast Company
With equity risk premiums, caveat emptor! [Nerdy, educational] – Musings on Markets
Investing meets US politics mini-special
The partisan portfolio divide – Klement on Investing
Are Republicans or Democrats better for the stock market? – Retirement Researcher
Naughty corner: Active antics
Holder or investor? – Humble Dollar
What makes a great investor – Charlie Bilello
Does adding dividend stocks to a portfolio improve performance? – Morningstar
AKRE capital: compounding with concentrated portfolios [Podcast] – AWOCS
The principle-agent problem in modern finance – CFA Institute
Kindle book bargains
Factfulness: Ten Reasons We’re Wrong About The World by Hans Rosling – £0.99 on Kindle
How to Avoid a Climate Disaster by Bill Gates – £1.99 on Kindle
Doughnut Economics by Kate Raworth – £0.99 on Kindle
Trillions [Inventing the Index Fund] by Robin Wigglesworth – £0.99 on Kindle
The practicalities of Net Zero – A Long Time In Finance
The Australian town where people live underground – BBC
Fiji turns to underwater sculptures to restore its bleached reefs – Guardian
Blackrock’s backlash signals a reckoning for ESG ETFs – ETF.com
The summer everyone saw the sharks – Slate
Off our beat
The short, spectacular life of that viral room-temperature superconductivity claim – Science
Why a room temperature superconductor is [if we ever see one] a big deal – Vox
How to make cities safe – Unchartered Territories
The hidden harms of CPR [Tough read] – The New Yorker
How the pandemic messed with our perception of time – Vox
The problem with portion sizes – Which
He visited 195 countries without flying and it nearly broke him – SMH
Suspicious package: expert level humble bragging at airport security – Slate
“Sensible, passively-managed, low-cost portfolios are now the norm, rather than the outliers they were in 2006. I remember debating its merits around that time at an industry conference and sensing that the audience seemed to think I had come from Mars!”
– Tim Hale, Smarter Investing: 4th Edition
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