Assessment of value - time to be brave
12 December 2019
The Financial Conduct Authority’s (FCA) new assessment of value rules require asset management firms to conduct a root and branch review of their UK funds, and then report their findings to investors. Firms are faced with the prospect of revealing previously unseen aspects of their operations for public scrutiny. With the first reporting deadline fast approaching in January 2020, now is the time for firms to be brave and stand behind their offering to investors.
Be brave in explaining the value you deliver
Firms have the opportunity to explain how the quality of their service offering adds value. Advice, guidance, interactive tools, apps, call centres, fund reports, financial strength, investment research, strong governance, risk controls, compliance, custody… the list of potential services goes on. Yet in our experience few firms have successfully articulated the full extent of the services they offer to investors, or attempted to justify how these relate to charges. Firms have nothing to gain by being bashful. They should be brave and explain their assessment of the quality of service they offer; to their investors.
Reporting on performance should be more straightforward. One of our ‘go to’ questions when challenging clients on their approach is to ask if an active fund that has failed to meet its performance objectives, can still be judged to have delivered value to investors. Our view is that the answer to this question can sometimes be ‘yes’. We have been surprised by the unwillingness of some firms to grapple with this question head-on, and instead look to try and avoid or talk around the issue without clearly explaining their position to investors. Firms should be brave and be prepared to justify underperforming funds they believe still offer investors a valuable proposition.
Be brave in justifying your costs
Do the leading smartphone companies consider they offer customers value when charging ever increasing sums for a smartphone, and generating reported margins in excess of 50% on each one sold? Clearly there are differences between financial services and consumer goods, but in each case the product manufacturer seeks to earn a margin. If firms have examined their costs for managing each fund, and are comfortable the profit generated represents a justifiable return for shareholders, they need to be brave and explain this position to investors.
Economies of scale is proving to be the most vexing of the seven prescribed assessment criteria. The underlying analysis is challenging, as is deciding what action to take. We understand the FCA is supportive of firms that have decided to introduce tiered pricing models. But many firms are reluctant to go down this route, highlighting both commercial and operational barriers. If firms do not think tiered pricing will work for their business, they should be brave in explaining why not, and offer alternative solutions.
Be brave with reporting
Many firms are nervous about publishing their first public report, preferring to see competitors’ outputs first. We think this is overly cautious. The relatively short public statements most firms have planned are unlikely to reveal key details on the underlying analysis, or the methodologies they have adopted. Firms should be brave, take the initiative and produce a public report that they think is best for their investors.
If firms are light on content in these reports and only pay lip-service to the new rules, they may come across as being evasive and obtuse, perhaps suggesting they have something to hide. We think investors will be forgiving of firms that are brave enough to recognise and disclose where they need to improve the value of their funds and take steps to action this.
How PwC can help
We can assist firms design an approach to the assessment of value that meets the requirements of the rules, and brings benefits to both their fund investors and their own business. If firms have already developed an approach, we can review this and suggest enhancements based on our insights gained while working with some of the largest UK asset managers.