Individual Investors Victims of Uncompetitive Industry says UK Regulator

Date: 6th January 2017

When taking into account pensions and lifetime savings, many citizens have significantly more money stashed away with the asset-management industry than they do with banks, yet the industry’s oligopolistic ways have ensured that fees have remained unchanged over the years resulting in some of the highest operating margins of any industry. There is one important exception in the shape of index tracking funds, bucking the trend in the industry and providing far lower fees.

A quick look at the UK asset management industry reveals two overarching problems that directly and negatively affect investors’’ revenues:

Whereas fees for Index Funds have dropped by more than half in the last decade, the persistent reluctance by financial advisers to recommend them to individual investors makes that index funds still only represent a very small fraction of the retail market.
Since active managers rather routinely underperform the index after costs – a fact once more confirmed by the FCA study and many others including research by BETTER FINANCE – “active” managers easily eat up to a third of investors’ returns in charges.
Add to that the fact that, since most retail investors are completely in the dark regarding the existence and impact of fees, fund managers do not need to compete on price and can simply provide the most favourable handpicked past performance figures instead, conveniently omitting failures in the process.

Sadly these findings constitute just the tip of the iceberg. Following a request by BETTER FINANCE, the European Securities and Markets Authority (ESMA) carried out an investigation into the phenomenon of “Closet Indexing”, uncovering worrying cases in the asset-management industry of selling falsely active funds to retail investors.

With retail distribution actively resisting the promotion of indexed investments, all too often providing misleading information to individual investors and some fund managers selling falsely active funds, individual investors are the victims of a worryingly uncompetitive industry.