UK-based investment advisors need to be tougher when negotiating management fees and work harder to identify outperforming managers, according to a study by the Financial Conduct Authority.
The UK watchdog, which has spent a year studying the industry, said consultants appear to focus on making sure managers’ fees are in line with the market, rather than driving fees down.
“There is an emphasis on negotiating fees for clients with a larger amount of assets, who may have been able to receive scale discounts from managers anyway,” the report added.
It also found a lack of price competition, which is inflating management fees. These fees, it said, are generally not justified by higher returns.
“When looking at the performance of investment products recommended by investment consultants our analysis shows that, across all product categories taken together, consultant-recommended products do not perform better than non-recommended products,” the report said.
To remedy the matter, the watchdog proposed an overhaul of management fee structures, and recommended the introduction of an all-in fee so investors can compare charges easily.
The report also said the manager rating process used by consultants to assist pension funds and other institutional investors in manager selection acts as a “barrier to entry, expansion and innovation.”
It also said the due diligence processes employed by some UK-based investment advisors failed to identify outperforming managers, although it generally did reduce operational risk for investors.
It is not clear whether the study included alternative investments and advisors.