Asset managers are profiting from their clients assets through excess profits from foreign exchange transactions and bundled research costs says the former head of the Investment Association.
Daniel Godfrey, former chief executive of the IA who stepped down from the role last October, told today’s Transparency Task Force symposium that asset managers need to adopt a new mindset of only profiting through the charges they have contractually agreed with their client. He is now non-executive director of Big Issue Investment Management, the investor forum and the Ethical Capitalism Group.
He compared the practice of using bundled commissions to pay for research, which does not come out of the AMC but reduces the manager’s costs, to find the solicitor one has commissioned is getting its rent paid by the QC it has instructed on one’s behalf.
He also said the industry tended to take a short-term approach to risk and volatility, putting long-term savers into products that avoid high volatility. He argued the industry was reducing outcomes by being too cautious with regard to the volatility message it presents to customers.
Godfrey said: “Asset managers act as agents and they have a contract to deliver the mandate at the lowest possible cost. And delivering the lowest possible cost involves a mindset, a proposition that asset managers should only benefit through the fee they agree with the client. We exist in an industry where in a world there are many legally permitted opportunities where the agency can benefit from the client.
“They can benefit from receiving free research that has been funded by them paying bundled dealing commissions. They can benefit under certain arrangements from very low custody costs where the custodians make excess profits on foreign exchange transactions. There are many ways in which they can benefit. But if I was paying a solicitor to run a case, I would be surprised to find the QC they had hired was paying their rent. And we have to adopt the same sort of mindset for the asset management industry.
“But because it is difficult, because there are many ingrained practices it is hard to move forward. And that is where the Transparency Task Force has a real role to play. It is important that managers recognise every action they take should be taken with a view to delivering the mandate at the lowest possible cost.
“At the moment it is absolutely clear that consumers and local authorities find it difficult to trust fund managers, and that is not a situation that is acceptable.
“Behavioural finance is a part of the solution, but I am disappointed that the industry has used behavioural finance to act against consumers rather than to get better outcomes. An example of this is how the industry deals with loss aversion. We say consumers don’t like losing money, so we should take money off the table when markets are volatile. But for most people, they see risk as losing money for ever. If you are investing for a 40-year horizon and paying money in every month, taking risk off the table reflects a mindset that is leading to poorer outcomes.”