One of the issues identified in the FCA’s Asset Management Market Study was a lack of competition among fund providers on fees and charges. The regulator’s response was to create new rules requiring authorised fund managers (AFM) to conduct an annual assessment of value (AoV) of their fund. The requirements are set out in COLL 6.6.20, which took effect on 30/09/2019 and are intended to ensure that firms assess whether fund fees are justified by the value provided to fund investors. Details of the assessments must be reported to investors together with a clear explanation of what action has been or will be taken if they find that the charges paid by investors in the funds are not justified.

In carrying out the required assessment the AFM must, separately for each class of units in a scheme, consider at least the matters set out in the table at COLL 6.6.21 which lists the following criteria.

• Quality of service
• Performance
• AFM costs – general
• Economies of scale
• Comparable market rates
• Comparable services
• Classes of units

This process had some real-world impact when the first annual assessments were completed. Some funds were closed, and some merged with other funds, presumably on the grounds that the AFM could not justify that the fund offered overall value when considered against the criteria above. And with impeccable timing, St James’s Place Wealth Management announced today (13 July) that it has placed two funds on a watchlist over performance concerns identified in its most recent AoV, providing further reassurance that the requirement to assess and demonstrate value to investors is making a practical difference.

However, the FCA recently undertook a review of the quality of value assessments by AFMs. The findings do not make comfortable reading for those concerned. A review of 18 fund managers between July 2020 and May 2021, covering different business models and sizes, found most had not implemented Assessments of Value (AoVs) arrangements that met FCA standards.

The review found that, while some had been conducting AoV assessments well …

• too many AFMs often made assumptions that they could not justify
• when considering a fund’s performance, many firms did not consider what the fund should deliver given its investment policy, investment strategy and fees
• firms spent a disproportionate amount of time looking for savings in administration service charges that cost investors relatively little compared with the time spent reviewing the costs of asset management and distribution that typically cost investors much more
• some firms did not meet the standards expected, using poorly designed processes that led to incomplete assessments of value
• some of the independent directors on the governing bodies (or Boards) of AFMs did not provide the robust challenge we expect and appeared to lack sufficient understanding of relevant fund rules

No doubt the review will lead to further pressure on AFMs to get this right for the future.

So what?

The ‘so what’ for adviser firms is that the published AoV should form part of the research and due diligence process when selecting funds for inclusion in client portfolios or when selecting model portfolios with funds selected by a third party.

That some AoVs have been found wanting thus far is a concern and firms should be taking appropriate action to obtain and review AoV information and to ask questions of the AFM about its robustness in light of the FCA findings. And, as the assessments must be carried out annually, the review process should also be at least annual.