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FCA asset manager report does not bode well for industry, reckons Liberum

Published: 20:32 21 Nov 2016 AEDT

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The UK asset management industry is the second largest in the world and is the caretaker of nearly £7 trillion of the population's savings

The financial watchdog's damning report into the UK's asset management industry does not bode well for future revenues and profitability in the sector, says City broker Liberum.

The report, which was a year in the preparation, showed a number of points including that there was a lack of competition and transparency on charges, which left customers paying too much, highlighted Liberum. And paradoxically, if profits in the industry were to decline, that could lead to even less competition, says the broker.

The UK asset management industry is the second largest in the world and is the caretaker of nearly £7 trillion of the population's savings.

Many rely on such funds to provide adequate funds in later life, in the light of low interest rates and uncertainty about the State pension.

One of the key themes was that  there should be a standardisation of costs and an "all-in-fee" so consumers can better see how much they are paying for a fund.

Notably, the Financial Conduct Authority (FCA), said that passive funds (which say, just track indexes) appeared to offer as good returns as active funds, and with lower costs.

It showed an example of a £20,000 sum invested over 20 years showed the same in an active as a passive fund.

"..the findings show limited evidence of a reduction in pricing due to competition in the active arena, compared to reductions being achieved in the passive world," noted Liberum analyst Justin Bates.

Such passive funds now represent 23% of the assets under management in the UK but are not being adequately promoted by advisers and best buy tables, said the broker..

While consumers suffer from a lack of transparency in price, asset managers on the other hand, are doing well, showed the report.

Profit margins have been around 36%  for the last six years, while average margins of firms in the FTSE All Share index have benen at around 16%.

Bates concluded: "....the report does not bode well for the future profitability of the industry over the medium to long-term and will undoubtedly lead to a reduction in revenues, bonuses, profitability and increased consolidation.

"Ultimately and perversely, this will probably reduce competition, in our opinion."

Hargreaves Lansdown plc (LON:HL.) shares are down 0.41% following the report to 1,219p (market cap £5.7bn), while Legal & General (LON:LGEN) slipped 1.12% to stand at 230.10p. Aberdeen Asset Management (LON:ADN) slipped 0.56% to stand at 284.40p (market cap  £3.7bn).

Liontrust Asset Management plc (LON:LIO), with a market cap of around £153mln,  was up 0.93% to 337.60p.

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