The Capital Asset Management response to FCA Market Study MS15/2.2

The Capital Asset Management response to FCA Market Study MS15/2.2


Capital Asset Management welcome the FCA market study interim report, due to the focus on increased consumer access to relevant information which they (the consumer public) can easily understand and compare, leading to better decision-making and enhanced outcomes.

Capital endorses and supports consumer clarity when it comes to charges, fees and costs for the total cost of investing. Capital is an advocate of expressing percentage charges in monetary amounts. Alongside this, Capital believes that now is the time for a complete root and branch overhaul of the wealth management industry in the UK, to include full disclosure, total costs, no cross-subsidy and the avoidance of conflict of interest.

The FCA scope should now be extended to include stockbrokers, retail advisers, discretionary private client managers, platforms and hedge funds into the full ‘in scope’ analysis.

The responses to the FCA interim report are as follows:

10. proposed remedies

The evidence suggests there is weak price competition in a number of areas of the asset management industry. Our analysis shows mainstream actively managed fund charges have stayed broadly the same for the last 10 years, that there is price clustering for active equity funds and asset management firms have consistently earned substantial profits across our six-year sample

One problem consumers face are professional bodies such as the IA and AIC representing the fund managers, not the consumers. AIC as a case in point blatantly try to drum up business for Investment Trusts. We need a new consumer-focused body that represents the investors.


We have concerns about how asset managers communicate the objectives and outcomes to investors. Investors may continue to invest in expensive actively managed funds which mirror the performance of the market because fund managers do not adequately explain the fund’s investment strategy and charges

Investment managers should be more accountable where funds effectively track the market. They should show their performance and fees against an agreed-by-all index benchmark. We also believe the KIID documents or equivalents should show the performance gross and net of fees. It is important to show ALL fees, not just the OFC. Annual turnover should also be shown and fees attributed to this too. Because firms can’t predict future turnover rates, they should be forced to publish the average from the previous three years.


Asset management firms told us that where they create a new share class they find it difficult to switch investors to these new, cheaper share classes

Regulation should insist the cheapest share class available is used for a like for like fund. FCA and HMRC should agree no capital gains tax would be due on such a switch. Fund managers should also offer the best share class to all platforms. Hidden agreements should be banned. Investors should access the same fund at the same price no matter what platform they choose. The platform provider is therefore incentivised to price their platform as keenly as possible.


A strengthened duty on asset managers to act in the best interests of investors, including reforms that will hold asset managers accountable for how they deliver value for money, and introduce independence on fund oversight committees

Professional bodies need to be held accountable too and should put the investor first. All fund managers should pass an “ethics” screen or test to prove they are TCF fit and put the investor at the heart of their business model.


Requiring clearer communication of fund charges and their impact at the point of sale and in communication to retail investors.

Yes. Total fees disclosed, not just OCF. Turnover rates in £ and % should be shown is associated trading costs. Performance should be shown gross and net of costs to show the effect of the fees.


The FCA setting out its expectations about how AFMs should demonstrate that they are acting in the best interests of unit holders–– governance reforms to help ensure firms comply with their responsibility to act in the best interests of unit holders

Agreed. Also, make the professional bodies responsible too.


Introducing an all‑in fee so that investors in funds can easily see what is being taken from the fund

The FCA must insist portfolio turnover rates are shown with associated costs. Some funds turn over 200%+ a year costing an additional 5% per annum in hidden fees trying to search for (out) performance.



The current OCF becomes the actual charge, with managers providing an estimate of any implicit and explicit transaction costs. This would be similar to A, above, but would oblige asset managers to provide an estimate of the transaction costs the fund will incur. This option would enable easier comparison of the likely total charges across different funds.

Yes, do it. And add in turnover costs and funds must show their turnover rates each year too.



Do you think that the scope of this remedy should be limited to retail investors or should it be extended to other types of investors?

It’s time to create a level playing field. Retail has always been expensive compared to institutional. It’s time the general public get the equalisation. Same rules, have total disclosure, all hidden costs shown. This will help drive down price. All growth/income within the fund belongs to the unit holder, fund managers should not keep stock lending fees for example.



Would it be proportionate and effective to require fund managers to be more specific with investors by clarifying an upfront objective and tracking performance against that objective over an appropriate time period?



Should we set out our expectations on using benchmarks, particularly when benchmarks are used to trigger performance fees?

Performance fees should be banned. They serve no purpose but to line the pockets of the fund manager. The argument for performance related fees are too flawed. “sharing consumers pain/gain” doesn’t work. They should get paid to do a job in a transparent way. No individual wealth manager/firm can personally influence global markets (legally) up or down and linking reward to this is illogical.


Are there other metrics/indications/pieces of information that could give investors better insight into likely future returns?

Total all-in fees must include turnover costs. Most active managers “trade” their performance away. Show future investment returns over 10/15/20/25 years as ‘clean’ and then after the total cost of investing.



Do you agree that the focus of any remedies in this area should be on investors in scenarios 2 and 4 outlined above?

Yes. End fund manager negotiating different deals with platform providers. They should offer the best price to all. No discrimination.



What would be the most effective format and mechanism to increase investor awareness of the impact of charges?

Monetary examples at £10,000, £25,000, £50,000 and £100,000 invested, in ‘clean’ and ‘dirty’ formats.


Are there better alternative options that would encourage investors to become more price sensitive?

Where KIIDs documents risk grade 1 -7, there should be a cost rating from low to high set by the regulator to drive costs down. For passive funds: Low could be 0.15%, medium 0.25% and high anything over 0.35%p.a. For active below 0.6% is low, 0.75 medium, over 0.9% is high. Change consumer terminology and call ‘active’ investing ‘high cost’ investing’ and ‘index/passive’ as ‘low cost’ investing.


What would be the most effective ways to communicate with investors?

Annual charges and total annual deductions including turnover trading hidden costs should be disclosed with the annual client statements.



Whether institutional investors would benefit from standardised disclosure of asset management fees and charges?

Yes, level playing field, institutional and retail.


The scope of fund/products that this disclosure template should cover? Should it cover private equity strategies and hedge funds as well?

Yes, all strategies should carry the same requirements to disclose ALL fees. It is clear that absolute return, hedge fund and specialist strategies fail in providing clarity on costs, benchmark performance so should be obliged to do so alongside traditional funds



What information on fees and performance information should be made public and are there ways to benchmark the performance of fiduciary managers?

Funds should disclose their fees each year with their annual statement/reports. Turnover must also be disclosed and the associated costs too.


What could any guidance from TPR/FCA to trustees in this area usefully cover?

Trustees are obliged to go with the empirical evidence. They should explain why they have ignored low cost options such as passive funds or low cost actives should they select high costs active funds and strategy funds. The fund selection should fulfil the investment policy statement.


Graham McCulley. Director.



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