Ben Cocks, director of Altus, on what to expect next from the share class debate.
The recent announcement by HM Revenue & Customs (HMRC) on taxing rebates has reinvigorated the share class proliferation debate.
The arguments put forward say that, because the likes of Skandia and Standard Life can no longer rely on a higher level of rebate to reflect their scale, they will require preferential share classes.
With each platform requiring a share class preference commensurate with its scale, the result will be a dozen or so share classes for each fund.
A share class solution: introducing the 'bare' share class
Clearly, this isn’t going to happen.
It would be horribly confusing for customers, the rug would be pulled from under the nascent re-registration initiative driven by the Retail Distribution Review (RDR) and, most importantly, I don’t hear anyone volunteering to pick up the soaring administration costs.
The most likely outcome is probably some halfway house with three or four share classes for each fund.
The platforms and fund managers will be forever wrangling about how much scale you need to get the cheapest class, re-registration will be slightly clunky (requiring post-transfer conversions in some cases) but will still work, and customers will only be slightly confused about which class they own and what the current price is.
Not so clean...
So, if that doesn’t sound ideal, what would?
The first conclusion to draw from the debate is that the clean share classes currently on offer aren’t very clean.
There’s clearly a significant margin in the typical 75bps rate still to play with.
So, supposing we turn rebates on their head and fund managers offer a single ‘really’ clean share class at 40 or 50 bps but also charge for transaction processing. (The word clean is already sullied so let’s call these ‘bare’ share classes).
An individual customer or IFA going direct to the fund manager would get this great value share class but would have to pay, say, £25 for each order they place.
The transaction fees would be reduced for the smaller platforms and waived completely for the largest players.
With this approach, the customer would have clarity on unit prices, quick and simple re-registration between platforms, and no unnecessary tax.
The platforms would have simpler administration processes and could still make use of their scale when negotiating with fund managers. The regulator would have transparency throughout on charges.
Deep down it feels like this is where we’ll end up at some point, but the question is whether there are any fund managers brave enough to announce they’ll be adopting bare share classes wholesale at the end of the year.
If the publicity this would create isn’t enough of an incentive, then the fact early adopters would inevitably be referred to as the ‘bare share bunch’ should clinch it – assuming, of course, that fund managers watched the same children’s cartoons as I did in the 1970s.
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