As debate surrounding the switch from traditional bundled fund structures to the newfangled unbundled “clean” and “superclean” funds matures, it has become apparent that determining which fund is better (ie cheaper) for clients is more complicated than simply looking at their respective annual management charges.
This is made even more urgent as news emerges that unbundled funds may actually be more expensive than their bundled counterparts.
So what exactly should you be looking at when deciding whether or not to switch your clients? Should you be taking the decision yourself or should you be leaving it to someone else, i.e. the client, network or platform?
What are some of the potential stumbling blocks when making this decision?
I spoke to several advisers about the issue and heard an intriguing variety of stances.
Doing the legwork
John Bloomfield, sole practitioner of the newly-launched Bloomfield Financial Limited, said that although the task sounds simple enough - merely determining if the client is paying more in the unbundled fund - it is more difficult a thing to do in practise.
“I checked the published charges of both funds. I look if the client might be receiving any additional rebates. If I can, I get a two-year projection for investment growth.
“Obviously all clients are going to be switched out in April 2016 unless they have invested directly. It’s just trying to establish whether it’s going to be cheaper or more expensive to transfer them before that.”
According to Mr Bloomfield, his network Sesame is currently drafting guidance for members on how to make the decision.
“All I’m worried about is I switch everybody on the basis that the FCA says people will be better off and then a claims management company pops up. You have got to be absolutely certain you are switching them to a model that’s charging them the same or less.”
In fact, Mr Bloomfield has found many on-platform clients are better off on low-AMC, higher-initial-charge institutional share classes, which he says are better for long-term investing.
“Most of the advisers I have spoken to want to switch everybody because it’s easy or switch nobody and let the platforms do it all in 2016.”
Finding another way
Paul Scott, senior financial adviser at restricted Paradigm AR Scott Financial Limited, says being restricted has allowed him to largely sidestep the problem.
Taking full advantage of Paradigm’s recommended fund list of approximately 100 funds, his investment committee and a few discretionary fund managers, he finds he only really has to confront the problem in routine annual client reviews.
Generally however Mr Scott is not switching unless he finds there may be a better alternative when conducting an annual review.
Could this be yet another appealing factor of going restricted? Mr Scott believes so.
“For an absolute independent trawling through thousands of funds it would be a mammoth exercise. There are so many important issues that you don’t want to be spending most of your time researching the oddity where an unbundled fund is cheaper.
“Nobody [at Scott Financial] is... doing a great amount of research on it. It’s a manual process. I’m not doing a systematic review of my whole portfolio and nor is any demand.
“We are on a restricted platform and nearly all of our funds are less expensive unbundled. In terms of new business there is absolutely no client interest whatsoever.”
Belonging to a network and operating a restricted model also absolves the adviser from a certain amount of regulatory responsibility, Mr Scott points out.
Taking it slow and steady
Before jumping onto the is-unbundled-really-cheaper hype train, one IFA made a very interesting point.
Mark Dunning, IFA at Oakland Financial Planning, argued that in many cases although the unbundled fund may seem more expensive it may actually be better for the investor in the long-run.
For example, if a fund advertises a 1 per cent AMC, a 65 basis point rebate after 12 months in a bundled model would go some way towards counteracting that, bringing the total to roughly 35bp per year.
In an unbundled model, although the initial AMC may be higher, it would mean more of the client’s money was invested for a longer time. This could in the long run be better for the client despite the fund having a higher charge initially, Mr Dunning argued.
“It may be more profitable to have the charge slightly higher but have the total amount of your money invested for the whole year.”
This makes things more complicated, and brings us back to Mr Bloomfield’s efforts to see two-year projections wherever he can.
Mr Dunning added: “It’s going to have to be done at some stage so I might as well get on and do it.”
