FSA is right on DFM client agreements, but wrong on rebates
The FSA has been listening to feedback about who should have a direct contractual relationship with clients.
Spoilt, that is what we are. Within the space of two weeks, we got a new consultation paper on platform rebates and a Final Guidance paper, titled Assessing Suitability: Replacement Business and Centralised Investment Propositions. I thought we might try to unpack some of the industry responses to these papers.
First I want to touch on something really positive from FG12/16. If we open our hymnals to section 4.9(iii), we see the following:
[The advisory firm…] arranges for the investment management to be carried out by the discretionary manager but on the basis that the client does not have a direct contractual relationship with the discretionary manager. Instead the discretionary manager treats the advisory firm as its client, which is acting as the agent of the end investor.
This is big news for advisers outsourcing investment through model portfolio services from discretionary managers. For bystanders wondering, there has been a worry that a tripartite relationship among adviser, DFM and client would have to exist, leading to “whose client is it anyway?” angst. But industry representations worked and we have a good resolution. It struck me that on the occasions the FSA does listen to feedback, we should tip our hats.
With that said, let us turn our attention to an area where – in my opinion – the regulator has gone on a monomaniacal spree – rebates.
On the one hand, we have providers such as Nucleus and Ascentric, pushing strongly for “clean” share classes which contain no rebate at all (generally at 75bps). On the other, we have “large” (more on those quote marks in a moment) providers such as Skandia and Standard Life who want to retain rebates and are either for unit rebates or neutral.
There has been a worry that a tripartite relationship among adviser, DFM and client would have to exist, leading to “whose client is it anyway?” angst
Both sets of providers are – understandably – pushing their own self-interest. Let us take the second set first.
The “larger” providers have been remarkably successful in driving large rebate deals with active fund managers. If we discount the natural 0.5 per cent trail inside most 1.5 per cent AMC active funds, these providers are pulling back up to 60 basis points from fund managers in extreme cases. More commonly the rebate will be from 35bps to 45bps, which the platform happily takes as its reward for distributing that fund. Now, of itself, this is not an evil thing. Why should not large companies flex their commercial muscle and do a bit better for themselves? Post-RDR, rebates (whether units or cash) will all go the client anyway, so is it not all good?
Yes and no. The providers I name (and others) are the ones most often identified with commercial challenges in terms of translating their scale into profitability numbers on the board. These commercial challenges mean that often the larger platforms are the smallest in terms of profit metrics, hence the quote marks. So how can they parlay their rebate deals into something which makes a difference to their top line post-RDR?