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The first value assessment reports are out – how is the industry doing so far?

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by Dawn Hyams, Head of Investor Insight and Governance

It was Andrew Bailey, now heading the Bank of England but formerly CEO at the FCA, who said “The effectiveness of communication with consumers is…a test of culture”.

The FCA’s request that fund management firms assess the value that they are delivering to investors in their funds has given rise to a flurry of activity across the industry. Combined with the arrival of iNEDs on fund boards and the fact that the assessment of value is called out as a formal responsibility under the Senior Managers’ regime, firms should be (and from what we can see many are) treating this as more than just a box-ticking exercise. In fact, from our perspective, conversations around delivery of value are prompting interesting and often challenging debates on value (and values), as well as the longer-term shape of the fund industry.

It would seem from the FCA’s recent ‘Dear CEO letter’ to fund boards, however, that they feel the need to reiterate the importance of the thought process behind the report – and expect to see evidence of challenge from the iNEDs.

It is certainly true that there are still some ‘pockets of resistance’, reluctant to embrace the cultural change that the FCA is calling for. Firms are also tackling value assessment in something of a vacuum – so it is reasonably difficult to get a handle on what ‘good’ looks like, given that there is no set format for reporting or the process behind it and that any guidance that has come from the FCA is open to interpretation. We keep coming back to the fact that this requirement fell out of the Asset Management Market Study and was prompted by the FCA’s view that too many funds were charging too much money for delivering close to benchmark performance to customers. The aim was to ‘out’ closet trackers and their close relations (again, a timely reminder on this in the FCA’s letter). The flipside, is that this can be seen as an opportunity for active managers to set out their stall and demonstrate the value they are adding.

Our observations so far on what good looks like…

Firms that are doing this well have genuinely considered customers as part of the process:

  • What do customers value?
  • What do customers understand about the fees they pay and what they get in return?
  • Is there a robust process behind the report to customers?
  • What was the quality of internal debate and how involved were the NEDs?
  • Do they understand your value assessment reporting?
  • Were the NEDs given enough information and time to be able to challenge the process effectively?
  • What are the remedial actions falling out of the process and how do these impact customers and their advisers?
  • How do you talk to customers about value assessment in a way that is meaningful to them?

Some of the reports that have been issued so far have completely missed the mark in our view – jargon-filled and with little context or explanation that will help customers understand why they should even pick up the report or care about what is inside. Will the FCA be more concerned with the internal process and debate? Yes, of course. For us, it comes back to whether or not the way you talk to your customers is a reflection of your culture. How seriously have you taken this process if you can’t even be bothered to report to customers in a language they understand?

Get in touch to find out how.

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Will sustainability shift the investment trade-off for good?

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by Josh Blundell, Head of Research and Operations

Every purchase decision we make involves trade-offs. Chips (yum) or salad (healthy)? Another coffee (caffeine hit) or top up the glass water (hydrated)?

We all navigate these trade-offs, driven by both conscious and subconscious factors – physical needs, desires, my willpower on a Monday morning in grey January – countless logical and illogical but all very human considerations and biases.

But they are also driven by information – and this applies also to society as a collective.

The recent scandal with diesel cars is a good example. Diesel – once heralded as more efficient for longer journeys and so a less polluting alternative to petrol – is now recognised as more damaging to the environment. The shift in purchase behaviour in the UK (driven by changes to incentivisation such as expansion of low emission zones in cities) has been dramatic – diesel accounted for 31% of new car registrations in the UK in 2018[1], down from a peak of 50% in 2016 and continuing its fall last year.

Better, more comprehensive information helps us make better, more informed trade-offs, both individually and as a social group.

In the world of investments – no matter how complex we try to make it – the core trade-off has always been relatively straight forward: risk vs return. Even today, all the research will tell you that by and large investors prioritise return over all other considerations.

But the information available to investors, our collective knowledge, is changing, no more clearly than in the sphere of sustainability.

We have never been more aware of the impact that our purchase decisions have on our environment and our society. 2020 is only a couple of weeks old but the terrifying images of the bushfires in Australia are beaming pictures of the deep impact of climate crisis onto our screens 24 hours a day.

So, as we embark on the UNs self-declared ‘decade of delivery’, we could be approaching a tipping point. Will end investors start to prioritise factors beyond risk and financial return? Will the long-term sustainability of our choices start to tip the balance in the investment trade-off, away from the purely financial?

This is one of the key questions The Wisdom Council will be looking to explore in 2020. You can find out more here.

[1] Vehicle Licensing Statistics: Annual 2018, Department for Transport

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Embracing the cult of the customer

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by Josh Blundell, Head of Research and Operations

Today is the day that the Senior Managers & Certification Regime (SMCR) kicks in for the asset management industry. The FCA hopes this move will strengthen market integrity by making individuals directly accountable and ultimately reduce harm to consumers – and lead to better long-term outcomes for the millions of investors whose money the industry manages. There is even a specific responsibility for authorised fund managers that covers value for money assessments, independent director representation and acting in investors’ best interests.

The conduct agenda pursued since the global financial crash has consistently signalled the need for a cultural shift in the industry. SMCR is the latest and perhaps the most persuasive prompt to date for firms to take a long hard look at their purpose and reflect on their role in the wider long-term savings landscape.

Is it really necessary for the FCA to spell out responsibilities in this way? Many of the customers we talk to on a regular basis would say it is. They still see remnants of the stale culture that placed little value on understanding end investors (though this outlook is thankfully far less prevalent than it was) and feel that they have to constantly remind firms just whose money they are running. In the wake of Woodford, customers are wary of the industry and there is no doubt that the reputational damage will take time to repair.

So can the industry rise to the challenge? The positive signs are there. We know that many teams at the product coalface in asset management have, for some time, been working hard to establish governance that genuinely considers customers and their needs. And not just because of regulatory pressures, but because it felt like the right thing to do. In some cases, they have met with pockets of resistance but with enough impetus from SMCR and with more NEDs starting to make their voices heard perhaps the tide is turning. The Asset Management Market Study remedies have already prompted a greater quality of debate in the industry – perhaps the SMCR will encourage firms to turn those words in to action.

There are some simple ways that you can create a direct line to end consumers that will go a long way to evidencing a robust response to SMCR – get in touch to find out how.