The UK Financial Conduct Authority (FCA) delivered an impressive study on the asset management market, asking “serious questions” about investment consultants and fiduciary management, according to Con Keating, head of research at BrightonRock, an insurance company for pension schemes.

Keating said the FCA delivered “a very good piece of work”, including with respect to how “they went after investment consultants” and touched on the “very important point” that the quality of their advice has never been able to be measured.

He said the FCA’s report “asks some really serious questions” about investment consultants’ move into fund management via fiduciary management and that there was “a very very strong case” to be made that these should be separated.

“Either you’re an investment consultant or a fund manager, but you cannot be both,” he said. “I really do think there should be a clear division between fund management and consultancy services.”

Specialist fiduciary management provider SEI has called for investment consultants to be required to sell or ring-fence their fiduciary management services to combat conflicts of interest. 

Keating, while impressed by the FCA’s work overall, said the report fell just shy of getting to the heart of how the business model of the asset management industry needed to change.

“They did miss one big opportunity,” he said. “They almost got there but not quite.”

He said the FCA had found that some fund managers underperform considerably but do not appear to get terminated, and that, for him, “the real [issue] is that the relative game will get more and more pressured by passive players”.

Describing the asset management industry as “a relative game about divisions of a fixed-sum pie”, Keating said this explained why it was “virtually impossible to maintain a leading position”.

He said investment managers needed to be more pro-active than they have been.

“They have to start looking at working with their investee companies,” he said, adding that pension investors with in-house managers, such as the Canada Pension Plan Investment Board and Australian Super, were the “furthest advanced” along the lines of that business model.

“That idea is where the future of the fund management industry has to lie,” he said.

Greater disclosure of costs and fees in the fund management industry will only exacerbate the trend towards passive, he said, “so the smarter fund managers will move away from that business model of trying to outcompete their neighbour and go elsewhere”.

Keating has elsewhere referred to the model he proposes as a co-operative, collaborative model of direct involvement, where fund managers, as per the descriptor, “co-operate and collaborate with their investee companies to improve the long-term performance of those companies – and with that, their own value and investment performance”.

The approach Keating described is said to have echoes of one adopted by some large European pension investors in recent years, to the extent that it has parallels with a shift to more concentrated equity portfolios based on higher-conviction active investing.

The UK’s Universities Superannuation Scheme is moving in this direction, for example.

Where the FCA “didn’t do anywhere near enough”, Keating said, was on “systematic efforts” to misrepresent fund management performance.

“They have been quite remarkable at defending their turf, and truth doesn’t necessarily have to enter their defences,” he said.

Keating strongly criticised a report by the Investment Association earlier this summer in which the industry body hit back at claims of high hidden fees charged by fund managers. 

The FCA has proposed an “all-in fee” for investment funds in addition to other requirements on asset managers to demonstrate value for money to investors.

Keating said he thought the all-in fee was a good idea.

“What we really do have to see is transparency,” he said.