Seven factors to assess value

Regulators have certainly kept the compliance departments of investment firms busy in recent years. Issues of competition, transparency and the costs and charges disclosures associated with the industry have been in a particularly dazzling spotlight – from major pan-European initiatives such as MiFID II and PRIIPs, and also at a more localised level from the FCA.

The Final Report of the Asset Management Market Study, published in 2017 after a year of fieldwork and consultation with firms, provided a withering review of the sector:

“We find weak price competition in a number of areas of the asset management industry. Firms do not typically compete on price, particularly for retail active asset management services.


“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.”


Christopher Woolard, the Director of Strategy and Competition at the FCA, summed up the general thrust of the study:

“… We see the report as indicative, first and foremost, of a market failure in the economic sense.”


Although critical of many aspects of the investment industry, the FCA has been constructive in its approach to corrective action. To strengthen the focus of asset managers on delivering the best possible outcomes for investors, the regulator produced a policy statement in 2018, with a follow-up paper in February of this year, containing a number of remedies to the problems diagnosed by the Asset Management Market Study. Much implementation work has already been done – for example, the new rules around the use of benchmarks:

  • fund managers should explain why they have chosen particular benchmarks, or explain to investors how they should assess fund performance if a benchmark is not used;
  • benchmarks should be referenced consistently throughout fund documentation, to avoid a ‘pick and mix’ approach; and
  • where past performance is presented, this should be referenced against each benchmark that is used as a constraint on how the manager constructs the portfolio, or as a target for fund performance.

Similarly, the FCA provided new guidance on fund objectives, to make sure they are clear for investors – using consumer-friendly language – and useful for them when comparing products and making investment decisions; amendments to rules on the calculation of performance fees have also been published.

These and other changes will certainly help reduce complexity and provide transparency for investors, two of the key issues identified in the Asset Management Market Study. But what about another – ‘value for money’? This is a notoriously difficult term to define, but the regulator has given substantial guidance in this area to help firms and consumers.

Authorised fund managers will now be required to produce an annual value assessment, which is to be made publically available to all investors. The responsibility for carrying out this assessment will be prescribed to a nominated senior person within the firm, who will be directly accountable to the regulator.

The FCA has stipulated that the value assessment should be published within four months of a fund’s financial year end. With the requirement coming into effect on 30 September 2019, the first batch of assessments will therefore be expected in January 2020, although some managers may look to get ahead of the game and publish earlier than this. Many funds use a calendar year end and so a large proportion of assessments will land in April next year. Firms may choose to include their assessment within fund annual reports and accounts, or as a standalone document.

What should asset managers include in their value assessments, and what should investors expect to see? The original intention from the FCA’s interim report was that the assessment would be centred on headline costs, but the scope has since been widened to give a much more holistic view of what constitutes value. There is no template for how the information should be presented, but the FCA does prescribe seven factors that must be taken into account as a minimum. These are listed in the COLL sourcebook under 6.6.21R.

Factor 1: quality of service

The fund manager should provide a general evaluation of the quality of service it provides to its investors. This might contain, for example, the effectiveness of its portfolio management, approach to customer service, internal governance processes, complaints handling and other ancillary services.

Factor 2: fund performance

Performance should be compared against the stated objectives of the fund, which will dovetail with the FCA’s work to clarify objectives and benchmarks for investors. The assessment needs to be made over an ‘appropriate timescale’, which will be determined by the fund’s strategy.

Factor 3: authorised fund manager costs

Here, the FCA is asking firms to compare the charges they levy against the cost of providing their services. There are many underlying fund operating expenses – for example, authorised corporate director and depositary or trustee charges, audit fees, custody costs – and fund managers will need to demonstrate that they are delivering value against these. It is crucial that managers try to negotiate the best deals from third-party service providers and pass any savings to consumers.

Factor 4: economies of scale

Through growth in the number of investors, or assets under management, firms may be able to achieve economies of scale. These should be detailed, together with an explanation of how the benefits from scale are used within the fund – that is, are the investors benefitting from economies of scale, or the investment manager, and does the firm’s pricing model allow an easy pass-through of such savings?

Factor 5: comparable market rates

Firms must assess the value of their services objectively versus the market. This will require careful judgement of an appropriate peer group, which may be tricky for some types of fund. A balance needs to be struck – too much data will place a heavy administrative burden on managers, but too little will not allow for a meaningful comparison and could lead to accusations of cherry-picking.

Factor 6: comparable services

Asset managers should compare their charging versus the costs for comparable services in the marketplace, such as institutional arrangements of similar nature and scale – research by ESMA has demonstrated that in some cases, retail investors are paying twice as much as institutional investors in UCITS funds, and there will need to be a clear rationale if firms take this approach.

Factor 7: classes of units

An appraisal should be included, showing the relative expense of the share classes that investors hold; if there are cheaper classes available, then there needs to be a justification as to why those customers in higher-priced classes have not been transferred – it may be the case, for example, that a transfer would incur substantial penalties or that the more expensive share classes come with additional services that explain the increased costs.

Overall, the report should be concise, yet contain sufficient detail to enable a fair judgement, and free from industry jargon, to allow it to be easily digested by a retail investor. The Investment Association’s Fund Communication Guidance will be a useful tool here.

Reading through the different factors, it is apparent that there is some subjectivity involved and managers will need to figure out the most appropriate framework that fits their business model. As with all regulatory initiatives of this type, there will inevitably be teething troubles before an industry standard is established. For some firms, collating the information required for a comprehensive value assessment will be difficult. Undoubtedly, some will struggle to provide a justification for their charging – this, however, is precisely the FCA’s intention.

Those firms with weak justifications will face public scrutiny and intense market pressure to reduce fees, increase their quality of service, or both. It is possible that we may even see some funds merge or close as a result. Importantly, however, the value assessment needs to be seen as a part of a wider regulatory push to deliver lower costs, superior service and better outcomes for investors, and that is something that ultimately should be embraced by the industry.

Head of Operations, AJ Bell Investments
Mark studied Economics at Liverpool University, and has a master’s degree in International Banking & Finance from Liverpool John Moores University. Qualified to CISI Diploma level in Investment Operations, Mark came to AJ Bell with nine years’ experience in operations at a custodian and an investment management firm.
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