The perception that the fund management industry in the UK facing growing pressures, which will inevitably require further consolidation, seems to only have intensified following the long-awaited final report of the Financial Conduct Authority (FCA) into the industry.
Martin Gilbert, one of the most high profile figures in the industry and long-time chief executive of Aberdeen has gone as far as to say that: “change is the only option” following its publication and warns grimly that companies that do not adapt will fall by the wayside. Indeed Gilbert has powerfully put his money where his mouth is, having merged Aberdeen with Standard Life. As many observed at the time, if Aberdeen – with more than £300bn of assets under management – feels the need for further scale if it is to continue to thrive, what do its smaller brethren need to do?
The report does not make any overt recommendations for consolidation, and indeed contains few major surprises from the interim report. Yet, many commentators suggest that it can only add to the existing pressures which are making life increasingly difficult for medium-sized, and even larger, firms that enjoyed healthy levels of profitability a decade or so ago.
Many within the industry lament that there are interlocking pressures on many fronts. These include margin pressure, a weak flow of incoming assets among active fund managers, rising operating costs and tighter regulation. None of the FCA’s recommendations are likely to ease these pressures, and some of them run the risk of palpably exacerbating them.
Some of the main themes which emerge from the report are: support for clearer disclosure of charges as a single figure; the standardisation of charges for institutional investors; a reduction in the barriers to consolidation of small pension schemes; and active encouragement of the appointment of more independent directors on to the boards of companies and funds.
Almost all of these are likely to exacerbate one or other of the pressures mentioned. Clearer disclosure and greater standardisation can only serve to put pressure on fees. In many cases this will only be at the margin, but taken in conjunction with attempts to pass economies of scale in large funds in to the customer, it is bound to have an adverse affect on margins for some. Similarly independent directors will need to be paid: whereas internal candidates often sit on such boards as part of their wider executive responsibilities, and receive little or no extra remuneration for discharging such roles.
Then there is a question of independent directors being likely to be more assertive in changing the management or the investment strategy of underperforming funds. Taken in conjunction with the encouragement to allow small pension schemes to merge, which will require legislation and take time, this will surely call into question the viability of some small funds. In some cases even the survival of the firms that manage them as independent entities are likely to be cast into doubt.
None of these effects are likely to have a transformative effect, and indeed many will hardly be noticed outside the industry. But taken in conjunction with the pressures which are already being widely felt, they are likely to accelerate consolidation.
The days of discretionary asset management companies being viable as independent entities with less than £1bn of assets under management have been fading for some time, and increasingly those with £20bn and even £50bn-£100bn of institutional assets are asking themselves what strategic steps they need to take to protect their profitability in the future. The speed of deal flow is likely to accelerate, especially once some of the legal issues surrounding Brexit become clearer.