The Financial Conduct Authority (FCA) is to launch an investigation into investment platforms such as Hargreaves Lansdown, amid concerns that market competition may not be delivering value to consumers.

The FCA says its forthcoming Investment Platforms Market Study will:

…consider how investment platforms and firms offering similar services in adjacent markets compete to win new customers and retain existing customers.

True, that doesn’t sound wildly excitement. It’s certainly no Liam Neesom Taken speech.

But reading between the lines, it seems the FCA has concerns that the largest platforms are not passing on their economies of scale to consumers, that they do not justify their dominance by securing big discounts on fund charges, and that they may not be doing enough to bring passive funds to consumers’ attention.

Where are the customers’ yachts?

The FCA announcement (and the lines you can read between) have come via the its final Asset Management Market Study.

The report – available to download as a PDF – also has plenty to say on fund managers and fees.

On fund charges, the FCA believes there’s not enough signs of competition in the market. It sees evidence of price clustering, and notes that while the growth in passive investing has coincided with falling prices for index funds over the past ten years, the asset management charge levied by active funds has remained broadly stable.

Now that might be fair enough, if hard-working active fund firms were already sweating hard to wring out every last penny of value for their investors, and hence had already competed each other down to wafer-thin profit margins.

But the FCA says the high levels of profitability among the firms it sampled (with profit margins averaging around 36%) indicates that:

…price competition is not working as effectively as it could be.

Or, as we might put it, that active managers are fleecing the public and providing little to show for it.

This matters because as the FCA says:

…when choosing between active funds, investors paying higher prices for funds, on average, achieve worse performance.

FCA is all for a single all-in fee

The FCA also supports a single all-encompassing fee to help investors more easily compare charges.

New regulation1 is set to introduce this for investors using intermediaries, but I don’t see why it shouldn’t be extended to all investors. The industry might argue that ordinary retail investors can’t evaluate such all-in fees effectively, but are we really expected to do better tallying up myriad opaque or hidden costs?

There is also much talk in the report about doing more to make asset managers act in the best interests of their clients – especially given that the FCA also found investors don’t appear to prioritize value for money as it thinks they should.

It therefore proposes to clarify what it expects of asset managers, to introduce more independent directors to governance boards, and to place a ‘prescribed responsibility’ under its Senior Managers Regime to make individuals more accountable.

The latter could be particularly feared – and contentious – amid fund managers.

Change is coming, ready or not

The FCA report is big and wordy, and it will take time to properly digest. You can follow the links I’ve given below for more reaction from some of the industry’s big beasts.

My own first thought was to reflect on how far we’ve come since the early days of this website.

Back in 2007 it seemed nobody was looking out for ordinary British investors. Most of us didn’t even know we were paying high charges and getting mediocre returns.

Sure, we knew the City had somehow grown over 40 years from a bunch of ex-public schoolboys taking long lunches at Rules into an full-sized economy-within-an-economy (which now manages an incredible £7 trillion of assets, according to the FCA).

But what did the evident riches of the financial services sector have to do with my pension or ISA?

Very little, the average investor assumed.

However since then we’ve had:

• A crisis that blew away any feelings of deference towards the self-proclaimed masters of the financial universe.

• Many years of low interest rates that have put more emphasis on costs and returns.

• The Retail Distribution Review in the UK that swept away the most archaic and onerous charges.

• The growth of passive investing, which has slashed costs while delivering more consistent returns to investors, and also put pressure on active managers.

• A Cambrian explosion of information and opinion about investing spread via the Internet, not least through blogs like our own Monevator.

For all the fanfare then, you could argue the FCA is simply rushing to keep up with these forces that are reshaping the market anyway.

What’s more the FCA report prevaricates and calls for more consultation, when you might say enough already. It also declined to issue a full referral to the Competition and Markets Authority. The investment consulting industry – which plays a big role in directing pension flows – will face an official competition inquiry, but despite the FCA’s concerns about competition, the wider asset management industry has ducked it.

However it seems a bit churlish to me to complain that the regulator hasn’t turned over every apple cart just yet.

Good regulation isn’t written in haste. And given the wily ability of the financial services industry to find loopholes and leaky buckets for every million they have under management, I think it makes sense to get the regulation right.

Let’s not forget that anyone who does their research can already buy cheap trackers on the right platforms and enjoy spectacularly cost-effective globally diversified investing.

For some of us, the future is already here.

Further responses and reading:

• Don’t forget you can read the full report yourself [PDF] – FCA
• City watchdog cracks down on industry charges – BBC
• FCA says UK’s £7 trillion asset management industry needs radical reform – Guardian
• The key points of the report in full – Professional Pensions
• “A very strong signal change is on the way” – Robin Powell
• UK fund management: The reaction [Search result] – FT

1. MiFID II. [↩]

There is nothing like investing when it comes to exposing yourself as a weak-minded gimboid.

I know all about buying stocks low and selling high. I understand the rationale behind Warren Buffett’s aphorism, “be fearful when others are greedy and greedy when others are fearful.”

Yet when my portfolio hits red, I fret. And when my return numbers glow green, I feel the pleasure centres in my brain light up like Vegas.

The uptick in fortune means it will cost me more every time I buy additional equities, of course. But hang the expense, I want to be a part of this now! The party’s on and I need to get my snout in the trough, quick.

I know this because despite being a good passive investor who pound-cost averages and rebalances annually, I am not an entirely mechanical man.

And oh, the flesh is weak.

Only flesh and blood

You see I have long allowed myself a measure of freedom when investing – a certain amount of money to put into the market every year that isn’t dictated by the calendar.

Don’t get me wrong. This isn’t a gambler’s float, used to punt on some company that’s rumoured to be on the verge of discovering cancer-curing jam. I invest my discretionary dollop in index trackers. However I’m free to do so whenever I wish.

Sounds good? The snag is that in reality I’ve struggled to take the plunge when the market has. I haven’t always been brave enough to blow my ammo when equities were relatively cheap. I’ve held on and on until the upswings, and then got less for my money.

Oh, of course I had my excuses. My brain was on hand with plenty of self-justification every time to reassure me that reason was in control, not instinct:

• I was worried about my job.

• My company was restructuring.

• My monthly drip-feed was already casting cash into the cavernous cake hole of the capital markets.

• I better not throw in any more in case I’m axed – then I’ll need every penny.

But in reality the overweening fear of loss was in charge.

In fact, what this optional investing has taught me is that I am just one of the herd, a member of the cattle class.

I’m not special at all. I react and feel like everyone else who makes up the statistics that show this sort of irrational behaviour costs investors.

Gorilla warfare

It takes willpower to overcome the apeman within. And there’s evidence that willpower is in limited supply for all of us. We can’t bank on having enough in reserve when we need it.

So the fewer decisions that are left up to my meat-bag of a brain the better.

Passive investing would be much easier if I could program a robot to handle it all for me and to physically prevent my continued interference, like some benevolent Dalek with a taser. Ah, a lazy investor’s dream of the future.

Given that I don’t expect Amazon to ship me my own automatic investing droid anytime soon, I have instead automated as much of the investing process as possible.

You see, the one human behaviour that does work for me is inertia:

• I don’t stop the broker’s direct debit that comes out of my bank account.

• I don’t mess with the regular investment scheme that funnels money straight to my chosen funds.

• I don’t take money out of lock-in schemes like ISAs, pensions and fixed-term bank accounts, where a cost is imposed upon me for doing so.

Inertia is the great human pacifier. It’s a force that’s regularly more powerful than fear in my world – especially if the fear is intangible like an investing loss.

Eliminate all carbon units

There are other weak points of human intervention that could yet scupper my plans.

I can fiddle with my asset allocation every time I choose the next fund to buy and, boy, what mischief I could get up to when it’s time to rebalance.

So far I have resisted the urge to keep thrashing my winners but it’s always taken a stiffening of resolve, and a quick prayer of deliverance to the passive investing gods.

Will I do the right thing in the future? I can’t say for sure. I’m regularly tested and I’m only a passive investor.

If you recognise these weaknesses, then you might consider trying one of the so-called robo-adviser services that have launched over the past few years. These can still be enablers when it comes to self-destructive fiddling though, and they can be relatively expensive.

Perhaps the closest proxy for a truly hands-off investing robot is the Vanguard LifeStrategy fund series.

LifeStrategy is an index-tracking, fund-of-funds with built-in rebalancing features – truly automatic investing. All you need do is pick the asset allocation of your choice, set-up a direct debit to keep it oiled, and then let the program run.

With this sort of investing the human being is taken off the table – which is the point of the exercise after all – and everything is left to the robot.

No more worries about pesky emotion.

Take it steady,

The Accumulator

What caught my eye this week.

I enjoyed a top floor view over the Thames this week at the book launch for the second edition of Lars Kroijer’s Investing Demystified. It was a pleasure too to meet his family including his young children, one of whom said she hadn’t read her father’s book because it was likely to be “gobbledygook”.

It’s commendable to be so skeptical at such a tender age about people who promise to share the secrets of making money. But Monevator readers who know Lars from his contributions to our website will surely beg to differ.

Indeed many of you have already read the first edition of Investing Demystified. Should you get the second? It’s substantially the same book, but Lars notes:

“Compared to the earlier edition I have downplayed the addition of non-essential elements to the book and moved to the Appendix a number of more tangential points, while keeping the core elements and focus on the rational portfolio unchanged.”

You probably don’t need both editions, then, unless you’re a Kroijer completist (in which case you ought to get his enjoyable hedge fund book, too).

If you’re new, starting with the new edition (which costs £16-ish from Amazon) is the way to go.

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