Fund managers falling short on assessing the value of their funds

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.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

We have some sympathy for AFMs in trying to implement AoVs. The rules are clear but leave a lot of room for interpretation. So it is little surprise that some AFMs have not quite hit the mark in their AOVs to date. We suspect that the FCA’s early review of AoVs will focus minds and that AFMs will conclude that the FCA is serious in its intent to drive good value for end investors. The findings should act as guidance for AFMs that might result in more robust and credible AoVs in future.

Action Required By You

Firms should ensure that the AoV information is incorporated into their investment/PROD processes. But that information needs to be scrutinised for compliance with the requirements and in light of the issues the FCA has identified. And, of course, the process should be documented as appropriate.
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About the Author

Paul is a Chartered Financial Planner and is well on his way to a Fellowship. He has a thirst for technical knowledge and, while he advises on all aspects of financial services regulation, he specialises in pensions and investments.

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