With asset managers under fire for potentially ripping off customers, following a scathing report from the Financial Conduct Authority (FCA), experts have revealed the way that consumers may be misled.
The FCA said in an interim report that there were a raft of issues within the fund management industry, recommending a number of improvements to the sector to benefit investors.
Experts are now urging potential investors to beware of potential issues before deciding where to put their money.
The regulator wants asset managers to have to set out costs in one all-in-one fee so investors can easily see what they will be paying and shop around for the best fund deals.
At the moment, asset managers use an ongoing charges figure to show customers how much their fund will cost them. But, the figure is only an estimated amount and missing out some charges, meaning that there is a lack of transparency.
The FCA has stated that asset managers are concentrating more on bringing in new customers, rather than on the returns of existing investors. Fees are charged as a percentage of the assets which have been invested, so managers have a vested interest in making sure that a fund grows and grows. The FCA, however, found that larger funds tended to underperform in comparison to their smaller counterparts.
Research has found that while closet trackers claim to be “actively managed,” they are actually making few active investments compared to the index they are following. However, high fees are associated with these funds in comparison with passive funds, as a result of the attention they claim they pay to the market.
Share class confusion
The FCA has also revealed that it is tricky for investors to make changes between funds and “shares classes”. Investors have been left in share classes which cost them 1.5 per cent a year or more, rather than in clean share classes in which they could pay only 0.75 per cent. It is overly complicated for investors to make a move from one to the other.
Andrew Bailey, the FCA CEO is now hoping that the interim report acts as a catalyst for investors to take a fresh look at the deals they are being offered.
A full report is set to be issued next year, following consultation, which the FCA hopes will lead to sweeping changes and greater transparency within the industry.