The charges of the light brigade

Charge for the guns he said

The publication by the Investment Association of a report that puts hidden costs in funds on a par with the Loch Ness Monster has been met with elation by fund managers and derision by their customers.

Robin’s right; I remember the pressure on Eagle Star in the early 90s not to introduce “non-smoker” rates on life policies. It was – according to then owner BAT – an admission of a clear link between smoking and death!

In our office we had a sign which thanked us for smoking and cigarettes were freely available from silver canisters on the boardroom table. I remember presenting at one trustee meeting and having difficulty seeing the other end of the table for smoke.

If Hubris increases proportionate to the imminence of calamity, then the days of charging opacity are numbered!

But let’s apply some simple emotional intelligence to the IA’s behaviour. The Investment Association is a member’s association; it is the voice of the members and can say what the members would like to say but cannot.

The guffaw that emanated from 23 Camomile Street when the presser was launched would have resonated through the marketing departments of any number of London and Edinburgh fund managers.

“This is precisely what members pay their subs for- well done the lads for sticking two fingers up to the cheese eating surrender monkeys at the TTF”.

It’s a dangerous card to play.

Dangerous because the “empirical evidence” that the IA underpins its arguments on , is largely discredited. To take an example, the methodology behind Fitz Partner’s Portfolio Turnover Rate (PTR) calculations was rejected by those designing MIFID 1 and has never resurfaced. Calculating PTRs as the lower of the buys and sells went out with the ark.

I will leave it to Con Keating to properly demolish the creaky bark. I’ll focus on it’s kelson.

The IA claim that for an average charge of 1.59%, the aggregated fund manager produces 0.71% outperformance. That means that more than twice as much value is retained by the agents as is returned to the owners. I cannot think of any other industry that prides itself in charging twice as much for a service as it delivers in value.

Even if we were to accept these figures (which nobody outside of the IA’s membership and tame consultants will), this is an admission not a boast.

Only in the surreal world of fund management can managers claim value for money on this basis. VFM, relative to what? Presumably relative to the 2 and 20 hedge fund managers that they aspire to be

A dangerous game

Lipkin and co have had their fun, the riotous fun of the press release is followed by the hangover and the question

“what have we done?”.

What the IA has done is tied itself to some pathetically inadequate research which provides selective data through an archaic methodology to give the troops a lift.

But they have exposed themselves as a lobbying outfit that has no authority, no integrity and no place in the policy debate. The FCA should look at this shabby document with contempt. The tPR should hang its head in shame that it points those reading its DC Code to the Investment Association’s 2012 Voluntary Code of Conduct.

The Investment Association have no earned authority, no integrity and have no place at the policy debate. Those who sit on the IA’s Advisory Board should stand up, resign and walk away. The Board is a sham and the new Code which the IA has yet to publish is already discredited. It has no place in the policy debate, should have no influence on IGCs, Trustees Boards or in the DWP’s deliberation on what the charge cap v2 shold be.

The IA is playing a dangerous game of bluff and is being called.

It’s strength is its weakness

The Investment Association has always called upon the solidarity of its membership to provide the powerful lobby to ensure it retained control of the costs and charges debate. It relied either on a Labour Government with insufficient gumption to take them on, or a Conservative Government with too many fingers in their pie.

It would seem that the current Government has decided to be on the side of those “just getting by”. The British Fund Management industry is many things but it is not “just getting by”.

The Investment Association’s membership is not the fantastic success story it thinks it is. It has got rich by charging twice as much as it has delivered value. It has done so for years because no-one knows where it takes its money. Now people know where the money is going (and we’ve seen the hidden charges), the game is up.

Like the tobacco industry in the 60’s and 70’s the IA has failed in the last decade to put its house in order. Instead it has made itself the pariah of those it serves. Like the tobacco industry in the following two decades, it will see itself having to re-organise, accept lower margins and adopt the new technologies that it is currently ignoring.

Ideas like the Blockchain which are almost unknown in fund management circles, will make the current inefficiencies a thing of the past. But it will also make thousands of those who work in funds redundant and will render the IA a shadow of its former self

Sometime in the “autumn”, the FCA will publish its market review of the fund management industry and those consultants who serve it. I expect that review to adopt a more sombre tone than the IA press release and for it to be greeted with rather less hilarity by the IA membership than this summertime jape.

For the money that pays for the petrol in the tanks of the Ferraris, is earned by people who are just getting by.

Into the valley of death