The FCA have announced the areas it will be focusing on in its forthcoming study of the asset management industry, in particular how managers compete to deliver value to investors. 

The UK retail fund market is home to many talented managers, but there is still a huge sum of money held in dinosaur funds which may well have been top of the food chain in their day, but now look unwieldy and high cost by comparison to more modern offerings.  The conundrum at the heart of this matter is there are billions of pounds invested in these dinosaur investment products, yet no-one is forcing investors to stay put. The solution to this problem is for financial services firms to encourage individuals to review their investments, and to provide them with the tools and information to help them do so.’

Dinosaur investment products

There are many attractive investments available to retail investments today, but there is also a huge amount of money still invested in legacy investment products which look tired by comparison.

Tracker fund polarisation

The polarisation of the tracker fund market is an example of this in action. There is a very competitive end to the tracker fund market which has seen fund costs slashed to the bone, with a UK tracker fund available from Legal & General for a fund charge as little as 0.06 percent per annum. At the same time there are tracker fund providers who are not playing this game at all, and are charging more than ten times as much for a near identical product.

The challenge for active managers

Meanwhile Neil Woodford has laid down a challenge for active fund management charges with his Equity Income fund, which is available from as little as 0.6 percent per annum. Yet at the same time there are other active funds out there, which probably deserve to be called closet trackers, and which charge almost twice as much as one of the UK’s most revered managers. We have been pushing fund managers hard to cut their costs, and as a result our clients can access active funds from a fund charge as little as 0.4 percent per annum, and passive funds from as little as 0.06 percent. However while Hargreaves Lansdown clients benefit from this cost push, there are huge numbers of other savers who invested ten, twenty, or even thirty years ago, and have never reviewed or switched their funds.

The power of inertia

As an illustration of this, most people investing in a Self-Select ISA today do so through a platform where they can mix and match the funds of different investment management groups. So far this year, fund platforms have seen net ISA sales of £3.2 billion according to Investment Association data (covering five of the most popular fund platforms). By comparison investors have switched £750 million outof ISAs held directly with fund groups, where they can only invest in the funds of that one investment company, and may pay higher charges. This shows what is happening at the competitive end of the market.

However it may come as a surprise that the total amount of money held in platform ISAs only recently exceeded the total amount of money held in direct fund manager ISAs (in July 2015 in fact). There is currently £67.7 billion invested in platform ISAs, compared with £66.5 billion invested in direct fund manager ISAs, which is a testament to the power of the inertia of legacy investors, given the clear preference of today’s active investors for platform ISAs. Few of us would drive a car that was twenty years old, and yet when it comes investment products it seems many are happy to sit in older vehicles, even if the roof is leaking.