Platform View: To suggest rebates are redundant is naive
There has been some squeaking around the industry suggesting rebates are now redundant.
That is no less naïve than the retail industry opining that suppliers should treat the corner shop to the same price as Tesco.
Many of you will have read that Skandia recently announced a simple, competitive and customer focused unbundled pricing structure for the platform. Contrary to some industry pundits, this price is competitive without taking account of fund manager rebates. I stress this at the outset so that you read this article in context - I am a champion of rebates (aka discounts) for the benefit of the customer and not for platform profit.
Even with so-called “clean” 100bp-or-less share classes, there is still an opportunity for fund groups to continue to pay any excess incremental rebate
In the unbundled world, fund manager rebates cannot be retained by platforms, but must be passed on for the benefit of customers in the form of additional units – more investment for the same money. One has to infer that the FSA recognises the benefits such arrangements will have for customers.
As I write this, not all fund groups have confirmed their share class models, or whether they will continue to pay rebates to platforms post R Day. I strongly believe that most fund groups will retain their 150 bps retail share class for legacy business and re-registration purposes and consequently rebate the former trail amount. Even with so-called “clean” 100bp-or-less share classes, there is still an opportunity for fund groups to continue to pay any excess incremental rebate.
For fund groups that do not offer those incremental rebates, their funds will appear less attractive to investors than those who do. They will therefore be less attractive to distributors. The better the terms offered to customers, the more attractive a fund will be to investors and distributors. Platforms are not compelled to offer every fund on the market. They may choose to market themselves to various target markets and customer segments. Basic economics tells us that suppliers should expect lower margin in exchange for wider and/or more focused distribution.
From a customer’s perspective, not only does a fund that offers rebates lower the net cost of investing in that fund and thus making it more appealing, it will also help the customer add value to their investments and enable them to grow their assets faster as the rebates will be reinvested as additional fund units or shares. The larger the rebate that is negotiated with the fund group, the more that is passed back to the investor making it even more attractive for them to invest in the fund via a platform that facilitates rebates. Advisers in turn should support this process. Lower costs for customers increase the relative value of any associated advice.