Investment start-ups are finding it difficult to overcome high barriers to success despite currently facing low entry requirements into the UK market.
The UK arm of professional body CFA Institute released its report Start-ups in UK Asset Management: A Study of Barriers to Entry & Success, which gathered the views of 126 of its members.
The institute also analysed data logged by the European Securities and Markets Authority (Esma) registers from 2014-2018, which said that over 1,000 new start-ups were authorised by the Financial Conduct Authority (FCA) to conduct investment management in the UK in the period.
However, as at April 2019, 5% of them are already inactive, and qualitative feedback from interviewees found that “survival” in many cases did not mean “successful”.
The report said that 2017 and 2018 were weak years for start-up activity, with only 47 investment firms authorised by the FCA in 2018.
This is compared to 192 in 2017 and 265 on average for each of the years between 2013-2016.
Reasons
The feedback from participating investment professionals found the most significant barrier to being successful was attracting clients and assets under management.
Will Goodhart, chief executive of CFA UK, said: “It isn’t difficult to start up new investment management businesses, but the fact that this is such a scale and track record dependent business means that many start-ups struggle to grow beyond the entry and survival phase to reach sustainable profitability.
“That’s worrisome. There’s already a high level of concentration in passive management and it appears that we are heading the same way in active.
“In assessing the competitive nature of the market for investment management, the FCA shouldn’t only consider barriers to entry, but should also be conscious of the barriers to success.
“Consumers benefit from environments that enable competition and innovation – from new entrants as well as established firms.”
Recommendations
Based on the findings, CFA UK has made two recommendations:
- Competition policy should be updated to focus more on ways to overcome inertia and to help consumers understand the potential costs and value of switching providers; and,
- More could be done to promote the technological innovations that would allow consumers and suppliers to find each other faster and cheaper.
