Background and Context
Many UK Authorised Fund Managers (AFMs) have now completed their first ever Assessments of Value (AoV). Deadlines were tight and firms were often coping with more manual processes and higher costs than expected. Asset managers are now considering how to streamline future work and efficiently integrate it with wider Product Governance.
The FCA has been actively engaging throughout, already suggesting that they will want to look at the level and pace of remediation and, somewhat surprisingly, that AFMs might have looked beyond the seven AoV criteria. Now is therefore the right time for firms to reflect on how to improve their AoV and meet evolving FCA expectations.
We expect to see hot topics such as ESG, the consumer voice, diversity, culture and independence to feature more strongly. Leading fund managers will be looking to embed a mindset of improving value for investors all year round and communicating it regularly.
Price and Performance – mature analyses are ripe for fine-tuning:
A common approach is emerging around performance and price, often linked to clarified fund objectives and the firm’s broader value proposition.
The AFM must work to explain underperformance, how it addresses it and how it holds the investment manager to account each year for their actions. We expect to see ongoing focus in this area, particularly for active managers, and we expect fund-buyers and the FCA to keep a close watch.
Comparing prices against suitable competitors was an early challenge, especially for more bespoke funds. We see two schools of thought emerging, each with pros and cons. Some are designing small, bespoke peer groups, while others are opting to use whole sectors (for example, IA or Morningstar).
Many firms have already taken significant steps moving clients from higher-priced legacy share classes into cheaper or commission-free share classes. We expect this to continue, as it grows harder to justify certain legacy fee structures, under ‘classes of units.’
The ongoing challenge is designing a robust and sustainable way to price products in an evolving market, reflecting how they perform and consumers’ expectations.
Costs and Economies – a tough area needing more groundwork:
Many AFMs have built a credible way of allocating costs across funds. A more difficult, sensitive question goes to the heart of our industry’s model: how these costs change over time as AUM moves, and how to share any benefits from economies of scale, where appropriate.
Key questions remain:
- At what level of the firm do we assess how economies crystallise?
- Do big funds cost less?
- Should we cut fees?
All must depend on AUM and costs across the entire firm. Opinion remains divided on whether to vary fees with AUM or to use one-off fee cuts to pass on benefits.
As the AFM’s assets, fees and services change, it must continue to show how it effectively manages costs in the interests of its investors. The FCA may view this year’s remedies as cautious, and firms will need to consider future changes strategically across their whole product portfolio.
Assessing the AFM’s Service Offering – an area likely to evolve:
The way firms evaluate their services will evolve. Leading firms are looking to objectively validate both the maturity and quality of their services to avoid being seen as ‘marking their own homework’.
KPIs will need to develop to better measure in-house (not just outsourced) services and any new or ‘differentiating’ elements – whilst considering costs. We also expect the ‘hot topic’ areas described above to become essential ingredients.
On internally comparable services and pricing, firms with global and institutional reach have been most challenged to show consistency or explain variances. This suggests a robust look within one’s walls in every room is needed to capture and explain the product portfolio. Firms that are rapidly growing or undergoing M&A will continue to encounter challenges around this.
What will the future of AoV look like?
As the AoV moves into business as usual, we see it becoming a keystone of effective Product Governance. We believe it will catalyse the Distribution and Product functions to become more strategic, particularly around pricing, fund lifecycle events and revenue and cost optimisation. In conjunction with SMCR, it will also reinforce the accountability of Fund Boards and ACDs.
AoV has already begun to re-frame how firms think about their wider value proposition, how they take the investor’s pulse and how they govern themselves with mutual interests at heart.
At Alpha, we continue to work with our clients on simple, scalable and improved ways to assess value. We are also looking beyond this at solutions to provide insights around product profitability and strategic decision making, alongside our regulatory implementation expertise.