Has Assessment of Value achieved anything?

We’re now two-and-a-half years into the Assessment of Value regime introduced by the Financial Conduct Authority. Under the rules, UK fund managers are required to assess the value they provide across seven key areas.

The rules were designed to improve transparency and competition and to bring down fees and charges. But has Assessment of Value made a positive difference? In the third article in this series on unit-holder inequality in funds, SUNIL CHADDA argues that AoV is flawed regime which has brought very little benefit to consumers.

According to the FCA’s Asset Management Market Study in 2017, the fund industry suffered from poor price competition and high profitability, with many active funds failing to persist in terms of providing ongoing outperformance. The Assessment of Value (AoV) regime was one of a number of remedies that the FCA introduced to try to protect investors who are less able to find better “value”.

The regime’s rules set out seven criteria, or principles, against which “value”, at fund share class-level, must be assessed annually by fund boards. The FCA-mandated criteria are quality of service, performance, costs, economies of scale, comparable market rates, comparable services and share classes.

For an investor though, “value” comes down to whether or not the fund has delivered on the performance “promise” made at the time of investment. Of course, customer service and other factors are important, but arguably less so for many like me who are saving for a purpose with a specific target date in mind.

The fundamental flaw in the system

The huge flaw in the FCA’s approach is the unchecked conflict of interest inherent in the make-up of the Fund Board. The majority of Fund Board members are senior employees of the fund management firm who own and manage the funds that we bought. And it is this Fund Board who have to analyse their own fund share classes and then declare them to be of “value” to us investors — or not, as the case may be.

Why would anybody believe an annual “value” statement provided by the very party who manage and market the product that you bought? You and I wouldn’t, whatever the product or service. It seems naïve at best, but, in the absence of fully independent Fund Boards, such an approach could work if the rules were tightly monitored and enforced.

In July 2021, after having carried out a review of the AoV regime, the FCA warned that it was going to take action as too many Fund Boards had “often made assumptions that they could not justify to us”. I am unsure as to whether or not any enforcement action actually followed, but I do know that many rule breaches that I identified in AoV Disclosures in the first year still seem to be recurring today. The third wave of AoV Disclosures are imminent.

Nobody has explained anything

We currently live in a netherworld of regulation, whereby what it says in the rulebook doesn’t necessarily reflect real life due to “transition periods” and other factors that help the industry, but at the same time, make it impossible for the retail investor to discern what is going on. Nobody, whether the regulator or fund management firms, has explained anything to us.

Imagine walking into a shop and seeing the same product on a shelf with not just the one price (i.e. cost), but with two or more prices, and they are all different. Shocked? Well, I will be writing about investment costs in future articles but need to mention this here for the purposes of assessing “value”.

Of most concern, however, is the fact that most fund management firms have been using a lower set of costs than we actually pay when they analyse whether or not a fund share class is deemed as being of “value”.

In one example, one large investment platform uses a set of costs for their multi-manager funds that are anywhere between 40% and 54% lower than the actual cost paid by investors. It all seems rather disingenuous to me and the AoV Disclosures that I have received for my fund investments have angered me.

It is even more remarkable given that the fund management firm concerned quotes the higher (and correct) costs on their own website but then uses these lower costs in their Assessment of Value Disclosure. Hopping between different costs or prices for different purposes is plain old cherry picking. It isn’t right and it isn’t fair to all of us who trust our fund documentation and those governance professionals who provide it to us.

Platforms don’t want you to find the information

If you do want to see what the AoV Disclosure has in store for your fund investments, then try searching your broker’s or your investment platform’s website. The official FCA nomenclature is “Assessment of Value’”Disclosure. But some firms call it a “Value Statement”, whilst others don’t want you to find their AoV Disclosure, whatever the name you use when searching for it. One unnamed retail investment platform that I contacted last week hadn’t even heard of the Assessment of Value regulatory regime and couldn’t find any disclosures on their website. I couldn’t either.

This poor practice appears to be systemic, rather than specific to any one firm, but whichever way you look at it, it’s a double-whammy for the retail investor. We are all no wiser as to whether our fund investments represent “value” and we get to pay the extra costs of the Assessment of Value regime, complete with rule breaches, for absolutely no benefit.

With the chances of identifying correct investment costs and charges disclosures slipping away (which is the subject of my next article) a proper objective consideration of “value” is paramount, especially with the cost of living galloping off into the sunset.

Now is the time for fully independent Fund Boards.

So, remember that much-asked bigger question? Is retail unit-holder inequality limited to the differential in share class costs, asymmetries in fund documentation and flawed “Assessment of Value” Disclosures?

Well, guess what? I think not.