Daily Archives: June 29, 2017

The Financial Conduct Authority concluded its two-year investigation into the U.K. asset management industry by ordering investment firms to provide customers with an "all-in fee." It's a welcome attempt to eliminate the hidden costs that undermine people's efforts to save for their old age. Far more effective than an increase in regulation, however, is the financial Darwinism already wreaking change on the industry.

The FCA move, announced Wednesday, obliges fund managers to tell investors how much they charge for managing assets, as well as how much is paid to intermediaries and an estimate of transaction costs. While knowing what the fees are is clearly important, achieving lower fees is even more essential to delivering better returns that will let pensioners retire comfortably.

British fund managers oversee almost 7 trillion pounds ($9 trillion) of assets, including more than 1 trillion pounds for U.K. retail investors and about 3 trillion pounds for institutional investors including pension funds. Almost three-quarters of the money is invested in active funds, which charge an average fee of 0.9 percent of assets under management, compared with just 0.15 percent levied on passive funds.

As things stand, customers aren't getting value for money from active funds, according to the FCA. "There is no clear relationship between charges and the gross performance of retail active funds in the U.K.," it said. "There is some evidence of a negative relationship between net returns and charges. This suggests that when choosing between active funds, investors paying higher prices for funds, on average, achieve worse performance."

The FCA calculates that, after fees, a typical low-cost passive fund would deliver almost 25 percent more in returns than an active fund over a 20-year investment horizon, assuming it matched the performance of the benchmark U.K. FTSE All-Share index. Once transaction costs are included, that outperformance of passive versus active investment soars to almost 45 percent.

Yet the growth of passive funds is already driving fees down across the industry -- and there's more to come. A survey published this week by State Street Corp. showed the vast majority of industry players expect more downward pressure on fees in coming years.

Under Pressure

Looking ahead to the next five years, to what extent do you agree or disagree with the statement that fee compression in the asset management industry will intensify?

Source: State Street industry survey of more than 200 asset managers, more than half of which manage more than $10 billion

As a result, 76 percent of the funds surveyed anticipate more consolidation in the industry, as my Bloomberg News colleague Sarah Jones reported earlier this week. Mergers and acquisitions are seen as an "essential strategy" for survival, especially for smaller managers, the State Street survey showed.

Aberdeen Asset Management Plc, for example, is merging with Standard Life Plc to create the U.K.'s biggest active fund manager. Aberdeen suffered about $85 billion of net outflows in the past two years, and it has seen a drop in the fees it can charge.

Getting Cheaper

Aberdeen's blended average management fee

Source: Company filings

In its interim report in November, the FCA highlighted that asset managers "have consistently earned substantial profits" in recent years, with an average profit margin of about 36 percent since the start of the decade. Little wonder, then, that U.K. fund management firms have outperformed the broader stock market since the financial crisis.

Fund Managers Outperform

Source: Bloomberg

Those days of outperformance may be drawing to a close, and not just because of increased regulatory scrutiny. The rise of cheap exchange-traded funds continues apace; active funds will have to fight harder for market share, by lowering fees as well as proving to investors that they really can outperform their benchmarks on a consistent basis. Darwinism, not tighter rules, will produce a healthier asset management industry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

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Darwinism Will Fix the Investment Industry - Bloomberg

A report published today by UK technology association techUK and the Centre for Public Safety explores how police forces can address the challenges and embrace the opportunities associated with the IoT.

The report,Policing and the Internet of Things, provides recommendations on how UK police forces can evolve with the fast-moving world of technology, particularly IoT, to create a digitally skilled police force.

Law enforcement officers in the UK have already begun to embrace emerging technologies, such as drones, for fighting crime. A growing number of officers are also using wearable cameras on the beat these days, while at least one crime scene investigation unit is already working on taking digital forensics from smart devices. However, more work is needed.

According to the report, with fraud and cyber crime now heading the list ofthe UKs top criminal offences, the growth of the IoT and the increasing number of devices connected to the internet means that the way police forces operate needs to change.

Not only have new risks been created, such as the deployment of ransomware onto devices, but more traditional crimes can now be committed online, targeting large numbers of people from almost anywhere in the world, it says.

Currently, online fraud is the most common crime in the country, but a joint report from the National Crime Agency and the National Cyber Security Center suggests that IoT-related crimes may soon become more frequent.

In light of the changing nature of crime, thereport recommends six incremental steps that police forces can take to address both the challenges and the opportunities of IoT.

To address the challenges presented by the IoT, they should:

To maximize the opportunities, meanwhile, they should:

Read more:Dubai rolls out Robocop to fight crime

The report has been endorsed by a number of senior police officers, includingAssistant Chief Constable Richard Berry, chief officer lead on the Digital Investigations and Intelligence Programme for the National Police Chiefs Council. Commenting on the report, he said:

The digital environment presents a number of challenges for public safety and the prevention and detection of crime. Police forces across the country have already adapted locally and there are many pockets of good practice. However, digital challenges can be different to those previously familiar to many in policing.

Working in new partnerships will help the Police Service discover and respond to threats and opportunities better and, in particular, closer working with industry will be critical. In order to fight crime in the digital age, it is vital that police have a good understanding of market capabilities. It will be important to ensure a regular exchange of ideas is facilitated, for police and industry to work collaboratively in responding to new crime and security issues.

This report sets out six incremental steps, which will help police forces meet the challenges presented and harness the opportunities available. Beyond this, I hope this report sparks discussion and debate for how we, as the Police Service can rise to the challenges of Digital Darwinism.

Read more:Ransomware disables connected hotel door system in Austria

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UK police to embrace IoT in age of 'Digital Darwinism' - The Internet of Business (blog)