PlatformsAug 5 2013

Share class confusion

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There has been unprecedented change in the platform market in the past couple of years, not only with the transition into RDR compliance but with more recent updates such as the latest platform paper, PS13/1.

These ongoing changes have understandably led to a great deal of confusion in the market, with different platforms adopting different strategies and an explosion of unhelpful terminology.

An example of this confusion is the mix of different share class options available. With advisers currently focusing on due diligence ahead of the next RDR deadline, it is more important than ever for the various options to be clear to advisers and their clients.

Clean (or ‘standard price’)

Clean share classes carry a typical annual management charge (AMC) of 0.75 per cent for an equity fund. The major advantage of this class is that it is simple and therefore easy to explain to customers.

Another advantage is that, as the majority of platforms use clean share classes, they do not hinder the automatic re-registration process.

However, as clean share classes don’t offer any discount to the customer, they can work out as the most expensive option.

Clean with a unit rebate (or ‘unbundled’ / ‘standard price with extra fund units’)

This is linked to the existing clean share class, but in this case platforms have negotiated a discount for customers in the form of a unit rebate. This means, for example, on a fund with an AMC of 0.75 per cent, a customer would be returned 0.08 per cent in the form of a unit rebate, taking the total cost down to 0.67 per cent, within tax advantaged wrappers.

Other than offering a cheaper price, a unit rebate gives customers the opportunity to improve their returns as the units are invested back into the fund. Also, as with standard clean funds, the re-registration process remains unhindered.

It is important to note that rebates in unwrapped investments are taxed as income. However, clients’ holdings in tax wrappers, such as investors in ISAs and pensions are unaffected.

Super clean (or ‘discounted’)

A super clean share class refers to a fund with a lower AMC than a clean share class. The idea here is that a fund would likely have a similar net cost to a client as ‘unbundled’, but without the need for a rebate.

The major advantages of this are that it is simple to explain, still improves client outcomes and there is no tax liability for unwrapped funds.

But this is an entirely new share class and many fund managers have yet to confirm if they will ever offer it. In addition, there is some potential for further delays to the re-registration process.

These distinctions between share classes will become clearer in the run-up to the RDR 2 deadline (April 2014).

With the current focus on pricing, the concept of total cost of ownership is rightly acknowledged as the best way of comparing costs. In order to make true comparisons, clients will need to consider fees, switching costs and funds’ TERs.

James Millard is director of investments at Skandia