Date: 3rd July 2017
In its Asset Manager Market Study published last week, the Financial Conduct Authority (FCA) pointed out that retail investors pay fees that are three times higher than those incurred by large institutions on comparable asset management services.
In its report, the Authority underlined the lack of competition with regards to funds sold to retail investors. This lack of competition leads to high prices which explains how asset managers can generate higher profit margins on funds sold to individual investors compared to those sold to institutional investors. Profit margins can reach up to 36%.
The FCA showed that management fees represent 0.23% for institutional investors compared to 0.69% for retail investors for an actively managed fund. This difference between retail and institutional investors could be explained by the fact that distributors and intermediaries who sell retail funds have less bargaining power than institutional investors. This high level of fees has resulted in an increase of investments in low-cost tracker funds.
The regulator proposes to reinforce the duty of asset managers to act “in the best interests of their investors”, but this measure is deemed too weak by the Financial Inclusion Centre.
One could also wonder what is “in the best interests” of investors: is it better to have less advice available at a lower fee or more advice but at a higher price?