The opening words of the FCA's Asset Management Market Study stress that the 'asset management industry plays a vital role in the UK's economy'. On first reading there follows 200 pages of what seems like well-aimed broadsides at the industry raising concerns about excessive fees, disappointing performance, hidden costs, high profit margins, weak price competition, poor cost control, weak fund governance bodies, etc. However, on closer reading, I interpret the review a being little more measured, very well thought out and at this stage, relatively targeted in the reforms that the FCA is considering putting through.

The study acknowledges the importance of the asset management industry to the UK, which generates around £17bn in revenues or about 1% of national GDP. We should also remember that when the FCA was set up in 2013, it was tasked with wider objectives than the FSA and these objectives now include 'promote effective competition in the interests of consumers'. This new obligation on the FCA is something that should be recognised when reading the report. That said, we hope that the FCA will also recognise the vulnerability of the industry at a time when the UK is extricating itself from the EU. The coming years will be trying ones for the economy and especially for financial services. Taking combative swipes at an industry that manages £2.7 trillion of assets on behalf of overseas investors and a major earner of foreign exchange could be counterproductive to the nation as a whole.

There are several snippets within the report which I find fascinating. For instance, the FCA notes that little comparison is being made to compare the 'fees charged by the asset manager for managing a retail fund's portfolio with the fees the asset manager charges comparable institutional client accounts'. This article considers precisely that.

While obtaining statistics for fund fees is relatively straightforward, the plethora of share classes in the post RDR world does rather complicate any analysis. Square Mile has recently undertaken an exercise to tidy up the data to enable easier like for like comparisons when considering whether a fund offers value for money. Obtaining information on institutional fees is somewhat more complex. Many asset managers do have a rack rate for their services, although these are dependent on the size of investment and how bespoke the mandate. Bfinance, an institutional consultant, have kindly allowed me to quote from their January 2015 study 'Investment Management Fees: Seeking Value for Money'. Bfinance have collated a typical cost based on a £100m mandate, although they advise that it is possible to negotiate these lower. The table displays the comparison. 
  

Column A

Column B

Column C

Column D

Column E

Sector

Median Institutional Fee

Median Retail Fund OCF (clean)

Median Difference in Fund OCF and AMC

Derived average AMC

Difference between Retail (D) and Institutional (A)

Equity

Global

0.58%

1.02%

0.20%

0.82%

0.24%

Europe

0.51%

0.93%

0.15%

0.78%

0.27%

UK All Companies

0.90%

0.11%

0.79%

US

0.50%

0.93%

0.16%

0.77%

0.27%

Emerging Markets

0.79%

1.00%

0.25%

0.75%

-0.04%

Fixed Income

Corporate Investment Grade Bond

0.24%

0.60%

0.09%

0.51%

0.27%

Corporate High Yield Bond

0.46%

0.76%

0.13%

0.63%

0.17%

Source: bfinance, FE, Square Mile

Column E shows the difference in AMC for retail/platform fund investors and institutional investors. The differential is remarkably consistent across asset classes and regions, at around 25bps. Obviously, it is far simpler for managers to market and receive £100m from a single client rather than a multitude of retail or wholesale investors. Despite this, fund investors actually get a better deal in Emerging Market Equities than institutional investors. This is a surprise. I have also included data on UK All Companies funds, even though bfinance includes the UK within Europe in their data. Interestingly, only 10.1% of active funds in the IA UK All Companies Sector have an OCF under 0.75% p.a., while nearly 75% of assets in the sector are in funds with an OCF between 0.75% and 1.00%. This ‘clustering’ is mentioned in the FCA review as a potential indication of a lack of competition on fees.

The other point of interest is the difference in cost for running corporate investment grade bond portfolios for institutions and funds, with fees respectively at 0.24% and 0.51%. I have enquired with the main managers active in both these spaces why such a differential exists. There appear to be several reasons for this, including the fact that institutional mandates tend to be very different in nature and are often run on a buy and hold basis.

Incidentally, Column B details the average fund OCF based on the clean share class commonly available on platforms with the cost data from Square Mile. Since the institutional fee reflects only the asset management fee, it seems reasonable to use fund AMC rather than OCF as a basis for comparison. Unfortunately, Square Mile does not have cost data for AMC and this must be derived in column D from the median ‘other expenses’ taken from the entire fund universe. While this approach results in an approximation, I think the median number will end up being materially accurate for our purposes.