The Australian funds management industry remains competitive enough but cost efficiencies may not be flowing fully to retail investors as the last link in a long distribution chain, according to the final regulatory report on the sector.
Released last week, the Australian Securities and Investments Commission (ASIC) report – carried out by Deloitte Access Economics – found a generally healthy level of competition in the local funds management industry.
“The evidence in this report suggests the managed funds sector has effective competition, as evidenced by new market entrants, innovation, and low fees by global standards,” the study says. “Industry outcomes and fund performance are also broadly consistent with competitive behaviour.”
Competition among more than 300 Australian investment managers offering a collective 3,700 plus funds have kept average retail fees down to about 0.87 per cent, the report says, with ongoing innovation in both distribution and products (such as managed accounts – akin to the NZ discretionary investment management service – or DIMS).
Furthermore, “this report finds no evidence of active funds charging higher fees while following passive investment strategies”.
Last year a more limited, ‘value for money’ study by consultancy firm MyFiduciary (on behalf of the Financial Markets Authority) found while most NZ fund managers were true-to-label there was no relationship between fees and ‘activeness’.
But among nine broad findings, the Deloitte study says Australian retail investors “are not highly engaged with funds management”.
“There are many intermediaries between fund managers and retail investors. This long, complex value chain creates issues regarding incentive alignment, transparency and the potential for conflicts of interest.
“… There is competition between fund managers on fees and discounts. However, retail investors may not receive the full benefits of competition over discounts. This is a result of principal-agent problems and a lack of transparency.”
Deloitte also found:
- there is no single source of truth that allows for direct comparison between funds;
- retail and wholesale investors are sensitive to the performance of funds; and,
- some participants in the managed funds industry have conflicts of interest, and this could affect outcomes for retail investors.
The study also says fund manager profit margins “do not appear excessive compared to other industries” – albeit based on limited data.
And while the report found fund managers on average underperform benchmarks after fees “this does not necessarily indicate poor value for money”.
“… there is some evidence that higher fee funds may perform slightly better but not sufficiently to more than outweigh their higher fees. On the whole, investors are not necessarily better or worse off for selecting higher fee funds,” the Deloitte paper says.
“Larger funds do not appear to achieve better performance, however, fund managers appear to be subject to decreasing returns to scale once funds reach a certain size.”
ASIC commissioned the 253-page report in the wake of the 2018/19 Royal Commission into financial services and subsequent reforms.
The regulator says “competition between service providers in funds management needs to work effectively to deliver optimal outcomes to retail and institutional investors”.
However, Deloitte highlights areas for future consultancy work.
“Fund managers compete to sell managed funds to investors within a supply chain which includes platforms, research houses, advisers and dealer groups, and third-party services. Competition in these intermediary markets, for example, between platforms, is not within the scope of this report.
“Rather, this report considers the behaviour of intermediaries in affecting competition between managed funds. This report identifies a range of competitive issues in the markets for the distribution of managed funds and analyses these where there are implications for the way fund managers compete and access investors. However, these issues warrant further investigation and analysis of their wider implications beyond retail investors.”
The final report follows on from an interim version released this March with findings based on targeted interviews, desktop research and industry consultation. Deloitte says Professor Ian Harper, Melbourne Business School dean, also “provided invaluable input into the development and review of this report”.
ASIC says it will use Report 702 – also known as ‘Competition in funds management’ – to inform ongoing regulatory work while the study has also landed on the desks of Treasury and the Australian Competition and Consumer Commission (ACCC).