Stephen Mohan, head of UK & Ireland at Allfunds Bank, has reignited conversations with fund managers and clients about ‘0%' share classes, amid potential changes to VAT rules.
According to the former managing director at Cofunds, the only obstacle standing in the way of the 0% charging structure was the threat fund managers would have to pay VAT on charges to platforms, which would have added an extra 20% to these fees.
However, the latest rhetoric from HMRC suggests these plans will be dropped, allowing fund managers to go ahead with 0% share classes without extra costs attached.
While elements of the platform industry have so far opted to push for super clean share classes from fund groups in order to preserve attractive legacy deals, the early signs are that few groups are willing to surrender much ground on price.
Fidelity’s personal investing platform buy list recently revealed it had secured an average clean price of 65bps per fund, broadly in keeping with the rates secured by other D2C platforms.
But the headline average is misleading. A look at the full range of 66 active equity funds initially published on the list shows just four active equity funds have AMCs below the typical bundled price of 75bps, raising questions over platforms’ ability to secure super clean preferential pricing from fund groups.
Mohan (pictured) claims a resurrection of the 0% share class could now be the best option for investors. “Super clean is not the answer,” Mohan said. “It is restrictive, complex, bad for investors, makes the fund industry more expensive, and makes platform to platform re-registration a difficult process.”
The 0% share classes that were proposed last year would in fact have been priced at a cost of around 50bps for an equity fund, with the fund manager charging each platform an individually agreed fee for transaction processing.
Mohan is advocating a slightly different share class. He wants to see a ‘distributor pays’ model with share classes priced at 0%, before a negotiable fee between the fund group and platform is added on top.
“It would turn the current structure on its head, and the fund prices would be dictated by market forces. It would eliminate the need to launch new share classes, and fund managers would benefit in the long term,” he said.
See next week's issue of Investment Week for the full interview with Stephen Mohan
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