Fund managers must state if they provide value for money or not
New rules forcing asset managers to prove their investment funds are providing value to investors are set to be introduced at the end of this month.
From 30 September, fund managers will have to start publishing ‘assessment of value’ reports, which detail their quality of service, performance, costs, and how well they’re doing against their competitors.
Funds often have different share classes, and in their report fund managers will also need to tell investors whether or not they are in the most appropriate share class for their circumstances.
Under the rules drafted by the Financial Conduct Authority (FCA), a regulator, the reports also need to be free from industry jargon so that the average investor is able to understand them.
The investment fund industry currently manages around £1trn for individual investors, and a further £3trn on behalf of people’s pensions.
In a landmark report from 2017 looking into asset management – what the fund industry calls itself – the FCA was scathing about how the whole sector operates.
It said: ‘We found that asset management products and services are complicated, objectives may not be clear, fees may not be transparent and investors often do not appear to prioritise value for money effectively.’
The reports that fund managers will now have to produce need to be published within four months of a fund’s financial year end, so it’s likely we’ll start seeing the first of these reports from January onwards.
While some of the details still need to be ironed out ahead of the deadline at the end of this month, seven factors at a minimum need to be taken into account by fund managers when compiling the reports.
First is quality of service, such as how the portfolio is managed, the approach to customer service and how they handle complaints.
Second is showing how the fund is performing against its objectives and choosing an ‘appropriate timescale’. For example, a value fund’s performance may need to be judged over five years, the rough timescale for the average business cycle.
Third is cost, comparing the fee they charge with all the costs for running the fund, while the fourth factor is economies of scale, detailing whether or not there has been a benefit if the fund manages to attract a lot of investors.
Fifth is comparing the fund’s fees to that of rivals, although obtaining information on fees from competitors could be commercially sensitive.
Funds also need to tell investors if they’re in the right share class, and also compare the charges for ordinary investors and those of investors like big pension funds. And finally, if ordinary investors are paying twice as much as pension funds for the same service, fund managers need to state clearly why this is the case.