I have a bit of light reading for you: the Financial Conduct Authority’s assessment of value report which you can read in full here.

Each year from October 2019 onwards, investments managers are obliged to make publicly available whether their funds offer value to investors. And the FCA is quite rightly not impressed with what it is finding.

In July 2021, The FCA was damning in its verdict on how poor these publications were in their sample of 18 investments managers (albeit we are not told who these 18 are). And this was following its review in 2020 when several firms admitted their funds didn’t offer value leading to Schroders, BNY Mellon, Jupiter and Hargreaves Lansdown, amongst others, to either cut fees, close or merge funds or even change the personnel running the fund.

It’s uncomfortable reading this report, and it is a terrible reflection on how badly the British public is being treated by the investment profession.

If you have any investments just type into Google ‘{fund manager’s name} assessment of value’ and see what you find. Some are tedious and long-winded; others are simpler and traffic light colour coded.

This year, for example, the FCA found:

• Many fund managers considered a fund still offered value to investors even when it had underperformed the markets (step forward St James’s Place).
• Blatant profiteering where one manager charged more for ESG (environmental, social, governance) services but couldn’t justify why it charged additional fees for doing so.
• Higher charging share classes were excluded from some managers’ reports.

I could go on… but in asking the investment profession to assess their value, what did the FCA expect?! Impartiality here is a noble aim but also somewhat akin to asking a turkey to vote for Christmas.

It’s good that the FCA is holding fund managers to task on such matters, but they rejected the concern that retail investors were ‘overwhelmed by over-lengthy reporting’ saying these documents should be ‘carefully constructed’.

It seems the FCA think the more information a retail investor receives, the better.

I disagree.

I think investors need simplicity and consistency of this type of disclosure. It’s just too easy to confuse and befuddle investors who end up making costly mistakes that the finance industry profits from.

(I also think it’s ironic when you should see some of the vague, lengthy guff produced by the FCA that we pay compliance consultants to wade through and translate for us).

If you give fund managers freedom to produce reports as long as they like and avoid any kind of uniformity and simplicity, retail investors simply won’t bother looking at them. Then again, maybe that’s what the fund managers want?

It’s probably going to be up to the journalists, bloggers, and vloggers to dissect such nonsense and shine a light on this. And the value for money to the end user provided by the investment management industry certainly needs light shining on it. As I’ve said many times before, too much of the investment management industry exists to make money FROM you, not FOR you. It is being dragged kicking and screaming by the regulator, the FCA, into offering better value. And quite right too, far too many investments are expensive, underperforming duds.

But hey, those fat Christmas bonuses, shiny City of London offices and sponsorship of the Six Nations rugby don’t pay for themselves you know!

Chatfield advocates the better parts of the investment management industry that exist to make money FOR you, not FROM you. It’s a subtle but crucial distinction.

The enormous weight of academic evidence is in favour of following the investment markets with your costs as low as possible. That is why we advocate the approach of Dimensional, Vanguard and other evidence-based investment managers. You may have heard it also called index tracking.

Yet the big investment managers have marketing budgets that keep this academic evidence far from investors’ thoughts. It is marketing over substance that XYZ Fund Management Ltd can beat the market – there is no evidence that this can be repeated with any consistency from year to year. It varies depending on which report you read but it is well known that most investment funds underperform their benchmarks.

One of the unintended consequences of the FCA’s approach might well be to push more fund managers and more retail investors towards following markets rather than trying to beat them.

Pressure will be on to cut charges, avoid standing out from the crowd, not straying too far from your peer group, and being singled out for having poor assessments of value reports on your website… what do you do? Make some staff redundant, cut the costs on your stable of funds by say, 20% and determine to follow what the market does rather than trying to pick winners (because you’ve tried that for many years and it’s not working!).

This approach already has a name: closet index trackers. You are charged say, 1% p.a. for a fund that states it will try to beat the market when in fact it will just follow it, and you could have done the same for a tenth of the cost.

The FCA keep saying they are not a price regulator, but I think the law of unintended consequences means there will be a lot more closet index trackers in the future.

You can find Vanguard’s January 2021 assessment of value report here.

You can find Dimensional’s April 2021 assessment of value report here (scroll to the foot of the page and click on the Assessment of Value link).