The reforms are badly needed and should have gone further. The industry has been getting away with unfair fees for far too long. Many investors have shockingly poor awareness of what they are paying and the impact fees have on returns. Typical active fees are high and destructive. Over time the fees can slice a third off the value of pension and investment pots. Smart investors know they can get the same or better performance for a fraction of the cost by switching to passives.
Most active funds fail to match let alone beat their chosen benchmark after fees are deducted, but still charge fees at a level that could only be justified by outperformance. Now we have to hope that the FCA's report will put an end to excessive profitability - average profit margins of 36 per cent point to a distinct absence of price competition - and price clustering, where far too many funds have exactly the same fees. As passive wealth manager SCM puts it: "Different products, with different ingredients and vastly different track records should command different pricing. Whether a fund is run by two or 20 people, is managing £200m or £2,000m, have a brilliant or disastrous track record, the price charged by active fund managers does not seem to change."
One welcome aspect of the report is that the FCA is also launching an investigation into platform fees, another area where costs are difficult to compare and which can make even cheap passives costly to buy.
Yet, despite all this, like most investors I hold both passives and actives. Why do we hold active funds when they cost so much more and disappoint so often? Most investors want to do more with their money than dully follow an index up and down. We want to be involved in choosing the theme or strategy. We want to be stock-pickers, to be contrarian, to pit our wits and use our research, not act as sheep. We use passives and recognise their great qualities, but we know that while active managers will seek out "accurately" priced assets, passive funds are helpless and sometimes must buy expensive assets even if they are low quality from the point of view of their earnings.
We know that active fund performance can be manipulated and that luck often plays a part in a fund's success, but hard work does too, and several fund managers have excellent track records over the long term.
The FCA agrees that active management plays an important role in pricing assets, and that in a market ruled by passive investment, prices might not reflect assets' underlying value.
So come on active managers, start playing fair.
