Under mounting pressure to justify fees and meet investor demands for transparency, asset management firms are raising concerns over the European Commission’s vague definition of «value for money,» arguing its subjective nature complicates cost assessment.
Asset management industry representatives are bemoaning the lack of a definition of “value for money”, saying its “very qualitative nature” makes it “difficult to assess”, especially concerning the cost of providing the investment service. Value for money is a key part of a European Commission policy change to replace its initial proposal to ban inducements for all investment products, which was very badly received in the industry.
“I think without a definition of value for money, it’s difficult,” said Veronica Buffoni, managing director at Carne, during a recent industry discussion. “Value for money is something that is still quite qualitative and I think that the fact that it’s qualitative makes it difficult to assess in a very homogeneous manner between firms.”
The question of how value can be measured is “a very interesting conceptual question,” said Emmanuel Doumas, senior policy officer at Esma’s investments and reporting division.
Equal but one
“What you do is you try to create groups where all parameters are equal but one and then you compare on that one,” he explained. “This is one of the tricky questions which are currently being discussed indeed at all levels, which is if you want to proceed this way, which parameter will you choose?” He explained that this is why the industry thinks that the “less questionable” figure is cost.
The asset management industry is under heavy pressure to justify its fees for investors and reverse the common perception the industry thrives on inflated fees for poorly performing investment products. Competition, new European regulations and the rising popularity of no-fee passive investing, such as no-fee ETFs are the proximate causes.
Buffoni, speaking at Deloitte’s recent cross-border distribution conference, referred to work carried out by the UK’s Financial Conduct Authority on defining value for money, saying they “really focussed on outcomes – it is around outcomes.”
Right outcome
“It’s not about the cheapest price,” she said. “It’s about having a product or service that effectively delivers the right outcome for a particular set of benefits.”
Whatever investment product a firm offers involves a given level of costs to bear, she explained. Such costs, plus a profit margin, determine the price an investor has to pay.
Operational costs include the impact of complying with regulation, in terms of processes, systems, staff and their skill sets, as well as service improvements like security infrastructure.
RIS cost reduction
While pressures to look at and reduce costs started as far back as 2010, one of the more recent efforts concerned the retail investment strategy, the flagship project of Commissioner McGuinness.
“The one underlying theme was reduce costs, reduce cost,” said Andreas Stepnitzka, deputy director for regulatory policy at Efama, which describes itself as representing Europe’s asset management industry. “Unfortunately, at least from our perspective, this whole idea of the value assessment was very outcome based. It became, in a way, a cost-based mechanism.”
He explained that in this focus on cost, some investment products might not be brought to market “if they were an outlier” he said.
Little interest
Stepnitzka recalled working on the Priip Kid and recalled how hard it was to project an investment product’s performance into a future outcome.
“I’m not sure honestly how many retail investors are actually looking at the Priip Kid,” he said.
After the investment in creating these investor-oriented documents, he said, “you can take the next step, you have a somewhat supervisory tool that is there – distinct parameters and it is making a selection decision in a way – it’s not artificial intelligence – but we’re subconsciously making a decision when we say those products provide a value and those are not.”
Starting with Ucits 4
The history of this pressure dates back to 2010 with Ucits 4 and the introduction of concepts like “undue cost” and the Kid document, as well as the requirement for transparency to allow investors to compare products, explained Jérôme Mousny from Luxembourg’s CSSF financial regulator.
The entry into force of MiFID 2 in 2014 was the next major development.
But it was in 2020, Mousny explained, when “the supervision of cost is accelerated, with the supervisory briefing issue on costs and fees issued by Esma.” This led to national regulators having to supervise management company fee practices.
The CSSF also played its part in a Common Supervisory Action (CSA) on costs and a report encouraging investment fund managers to have an independent pricing process.