Paul Richards, deputy head of FundsNetwork, runs the rule over ‘clean' share classes, and a couple of other things...
In June, the Financial Services Authority (FSA) issued a consultation paper (CP12/12) proposing that cash rebates and fund manager-to-platform payments should be banned from 31 December 2013. Even before this, it was becoming fairly clear that the general direction of travel in the industry was for fund managers to offer unbundled or rebate-free share classes.
However, the transition from bundled to unbundled is a process that may take some time. In the interim, I would argue that, while it may be possible to have a considered preference for so-called ‘clean’ share classes, care still needs to be taken to avoid adopting any wholesale proposition changes that might end up disadvantaging clients.
One very important consideration here, which may come as something of a surprise to some people given the prevailing industry narrative, is that instances may in fact exist where the bundled pricing alternative is a better choice from a cost perspective, when considering both explicit and implicit costs.
Share classes and other considerations
Whilst the consensus seems to be settling around a ‘clean’ fund fee of 0.75% for a fund with a bundled price of 1.5%, it is by no means clear that all asset managers will price their funds at this level. Moreover, industry practice suggests that explicit platform or wrap charges can be higher than those which exist within bundled funds.
Assuming that the adviser fee remains constant, the result will be that, in some circumstances, the total cost to the customer will be higher in an ‘unbundled’ world. The desire for clean share classes is an understandable one and it is fair to say that administering rebates from ‘bundled’ funds adds complexity for all parties. However, clients may well decide to accept complexity in return for a lower total charge.
On the wider subject of rebates, CP12/12 also made clear that models based on placing rebates into cash accounts that could also have fees deducted from them will no longer be allowed. I can see how there may be a temptation in some quarters to test the waters by seeking to preserve the essential feature of these models in various new guises, however, I would advise against this because the FSA’s determination on this point looks strong.
Finally, there has been a lot of interest in the FSA’s proposals to ‘read across’ its proposed rules for advised platforms into the domain of non-advised or execution-only platforms. There has been much comment on what the likely additional costs of this would be for non-advised platforms, but based on my discussions in the industry, I suspect the bigger issue will be about how these types of platforms can present themselves outwardly.
In short: in the past, non-advised platforms could benefit from a simple message that revolved in some way around cost competitiveness but, from 2014, the need to explain additional charges may mean that the once-simple message might have to get a lot more diluted.
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