Active fund managers are not worth the extra fees they charge for supposedly picking shares that will add value for investors.
In fact, says City watchdog the Financial Conduct Authority (FCA), neither active nor passive funds beat their own benchmarks once fees are deducted from any gains they make.
But active funds charge more for offering a similar service as passive managers – and revealed investors hold around £109 billion in active funds that do the same job as a passive tracker but cost ‘significantly more’.
After investigating how funds work and charge customers, the FCA concluded that no clear relationship exists between charges and fund performance.
This, says the FCA, suggests paying for a more expensive active fund generally achieves a worse performance.
Safeguards for investors
To remedy the problems, the FCA has decided to improve safeguards for investors by making fund managers more accountable and to make them disclose a standard ‘all-in-one’ fee that clearly explains investment costs.
The FCA also wants to launch a probe into how online investment platforms are serving customers.
Andrew Bailey, the FCA chief executive said: “The asset management sector is important to the economy, managing the savings of millions of people and in the current low interest environment it’s vital we help people earn a return on their savings. We need a competitive sector which works well for the people who rely on it for their financial wellbeing.
“We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.
“The implementation of the remedies will take place in a number of stages. Some do not require consultation and are now being taken forward.
“Some remedies will require further work in light of other legislative initiatives and will be consulted on later in the year. Finally, some of the measures are dependent on the outcomes of the proposed working groups.”
Andrew Carter, CEO of Royal London Asset Management (RLAM), said: “The FCA has chosen a sensible way forward, both in how to engage with the industry and the implementation timetable, taking account of upcoming EU legislation and Brexit.
“At the heart of its proposals stands the customer. As an asset manager owned by a mutual company this is already part of our ethos. Transparency is an important guiding principle, which benefits not just consumers but also the industry at large and therefore we support the move towards clearer presentation of costs and charges for consumers.”