CMA working papers on investment consultancy and fiduciary management services in the UK

Following a reference from the FCA as part of its Asset Management Market Study, the Competition and Markets Authority (CMA) has published the latest working papers as part of its investigation into the supply and acquisition of investment consultancy (IC) and fiduciary management (FM) services in the UK.

The first working paper: asset manager product recommendations (22 March 2018)

The working paper published in March sets out the findings of a market investigation carried out by the CMA to determine whether products recommended by ICs outperform their respective benchmarks, and therefore whether ICs provide value for money, in response to a claim by ICs that funds recommended by them beat their benchmarks between 2006 and 2015.

The CMA tested actively managed asset management products with data provided by eVestment. The eVestment data included contributions from Aon Hewitt, Capita, Hymans Robertson, Redington, Russell Investments, Willis Towers Watson, KPMG and LCP. Mercer, one of the big three ICs, does not subscribe to eVestment and so was not included.

The CMA concluded that "buy-rated" products do on average outperform their peers, but only on a gross return basis. There was no evidence that the products outperformed their peers or unrated products when the IC's fees were taken into account. The CMA recognised that recommendations were just a part of the service offered by ICs, but argued that this was an area that could add value and could be measured. The CMA also noted that this is an area that gives rise to a lot of claims.

The findings are classified as 'emerging,' and a provisional report is expected in July 2018.

The second working paper: barriers to entry and expansion (26 April 2018)

The second paper focusses on barriers to entry and expansion in the sector. The CMA found that barriers to setting up a new IC or FM are prohibitively high, and are greater in FM than in IC. The CMA also found that barriers to expansion and winning clients are potentially even greater, particularly in FM. The high barriers are exacerbated by the importance of reputation in the market, and a lack of opportunity for smaller firms to develop client relationships.

The third working paper: financial performance and profitability (26 April 2018)

The third paper focuses on the financial performance and profitability of six IC and FM firms. The CMA found that poor advice by IC and FM firms can result in poor investment decisions and/or excess profits for the IC/FM, but concluded that a profitability assessment was not proportionate. Therefore, the CMA could not confirm whether profits are regularly in excess of the cost of capital. The CMA did find that aggregate profit margins in the sector were between 20% and 30%, which is lower than the margins found by the FCA for asset managers, but higher than the average operating margins in the FCA FTSE All Share sample. The CMA is therefore seeking views on whether these profit margins appear to be too high, and on identifying a suitable industry against which to benchmark these profit margins.

The fourth working paper: competitive landscape (26 April 2018)

The fourth paper focuses on the competitive landscape in this sector. The CMA identified separate markets for the supply of IC and FM services to pension schemes in the UK. The CMA found that neither markets are highly concentrated, although the FM market is more concentrated than the IC market. In the IC market, 10 firms make up 75% of the market, and the three largest firms make up 50% of the market. In the FM market, no firm has a market share above 20%, but there are only five large firms (along with several medium-sized firms). The CMA predicted that concentration will increase over the next few years.

Respondents were invited to provide their views to the CMA on its findings in the second, third and fourth working papers by 10/11 May 2018.

What could this mean for firms in the sector?

The CMA has identified that the sector is not highly concentrated, but that there are significant barriers to entry and expansion. It is therefore possible that the CMA will decide to act to increase competition and make it easier for new firms to access the sector.

The CMA has also formed an 'emerging' view that services provided by ICs and FMs may not provide good value for money, once fees have been taken into consideration. This may put pressure on fees in the sector, or encourage those working in the sector to clearly demonstrate how they add value in other ways.

The CMA's working papers are not final, and it is likely that the CMA will publish reports, based on responses received to the white papers, before deciding on any course of action.