April 16, 2018

Value-for-money in UK asset management: taking a deeper look

Value-for-money in UK asset management: taking a deeper look

 

What to make of the FCA’s PS18/8 Asset Management Study Remedies released last week?

It looks like a damp squib in the wake of the key findings of the Asset Management Market Study June 2017 final report, but the value-for-money assessment and related disclosure requirements represent a significant new undertaking – equally an opportunity for marketing teams to show their worth.

Overall, the industry has emerged relatively well from the Remedies policy statement – certainly compared to asset consultants, which were earlier referred to the Competition & Markets Authority.

Let’s have a look at the main remedies being applied:

  • Prescribed responsibility – making the chair or other senior manager responsible for remedies implementation.
  • Value-for-money assessment – a significant new requirement discussed in detail below.
  • Independent directors – these are not uncommon in comparable jurisdictions and can ensure the customer voice is heard at the board. But it’s not costless; in fact it may represent a material cost increase for new and small asset managers – where much industry innovation takes place. The FCA argued (without citing any evidence) that the benefits for strategy and culture would exceed the costs, even in a new manager’s early years. But given the uncertainty of benefits vs certainty of costs, at a time when resources are tight, that’s a tough prescription for start-ups.
  • Share classes – overdue and sensible change to permit bulk transfers of investors from legacy to contemporary share classes.
  • Box (unit trading) profits – another overdue and sensible change to ensure that most or all of these profits go to investors.
  • Extension of policy to other products including insurance savings, investment trusts, and pensions – not happening for now.

Which brings us to value for money. The need for a value-for-money test for asset managers is less obvious compared to products such as workplace pensions. With auto-enrolment, many people are now invested in pensions without having actively chosen to do so. Requiring pension schemes to demonstrate value for money, such as via the IGC mechanism, makes sense.

Asset managers are agents and fiduciaries as the FCA points out, but at the end of the day, asset management is usually an optional purchase, and one which is often made by professional purchasers or influenced by professional investment advisers whom are already well informed.

NMG insights have also demonstrated that value for money is not itself a top-of-mind concept for consumers; rather they think in terms of returns, people (quality and service), and fee levels.

 

Asset Management: What matters to consumers when reviewing funds

Sources: NMG research for the FCA’s Asset Management Market Study, 2016. Base 2500 non-advised fund based investors.

However, value-for-money requirements are coming, and asset managers will need to plan carefully, because this is essentially how the FCA has chosen to address its disapproval of asset management economics for now.

The requirements are detailed only in the legislative instrument attached to the Remedies document. We’ve looked at what you will need to address the minimum considerations and the degree of difficulty of doing the assessment:

 

Consideration Example data needed to make assessment Difficulty
Service range and quality
  • Services actually provided
  • Quality benchmarking
  • Value to investors at level of quality delivered
Medium
Net performance relative to objectives
  • Performance data
  • Clear objectives
Easier
Margin over cost for each fee element
  • Activity costing
  • Effective prices charged
  • Margin calculation
Harder
Realisation and passing on of economies of scale
  • Relationship of costs, price, and margins with volume
  • Bargaining power of parties and agents
  • Division of scale benefits
Harder
Fee relativities to market
  • Definition of relevant market
  • Factors justifying premium / discount
Medium
Fee relativities to institutional mandates of comparable size
  • Rack and effective prices
  • Structure and servicing costs
  • Target margins by segment
Medium
Appropriateness of differentially priced share classes with similar rights
  • Product and customer breakeven points and profitability over time
Harder

 

There’s not a lot in the easy category. The table above is only a starting point, and it’s already evident that complying will be a significant exercise, given it needs to be done for each fund / sub-fund. While the considerations have parallels with what matters to the consumer, they go so far beyond it might well be asked who they are designed for.

To do this well requires a lot of data to be assimilated. deep marketing skills, and a good understanding of costs and profitability at product and customer levels. Sounds like a strategy project? Value-for-money can be seen as an FCA-prescribed annual marketing strategy review for each product.

A chair should be able to satisfy their new prescribed requirements by simply referring to the relevant paper from the head of marketing. A well-resourced marketing capability with strong stakeholder relations can deliver this. However in some cases, asset managers have under-invested in marketing, or seen it narrowly as advertising or communications to support the sales effort. That style of marketing team will struggle.

Value-for-money should cause asset managers to assess their marketing capability. The requirements go to the heart of the 4 Ps of marketing – product, pricing, placement, and promotion – and are considerations that marketing teams should be undertaking already. Where there are current capability gaps or activities being done elsewhere – pricing, costs, and product / customer profitability come to mind – this is the time to close them or bring them together.

For asset management marketers, value-for-money is ultimately about your marketing strategy; delivering on it is another great opportunity to demonstrate marketing’s importance and value (call NMG if you need help).

For more information, contact:

Charles Lake, Senior Consultant (London; charles.lake@nmg-group.com)

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