PlatformsNov 19 2013

Fund groups defiant over clean share cost hike claims

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Fund groups have defended pricing of their ‘clean’ share classes against allegations that they are using the changes to increase margins, with Aberdeen stating clients will have to accept certain clean share classes being more expensive than previous bundled options or invest elsewhere.

Aberdeen Asset Management, which has hit headlines this week after its £550m acquisition of Scottish Widows Investment Partnership from Lloyds Banking Group, was responding to questions over its unbundled funds which are up to 40 basis points more expensive than their bundled counterparts.

An FTAdviser analysis of price differences between bundled and unbundled funds on the Standard Life platform, which has begun to bulk switch to clean share classes ahead of new rules coming into force in April 2014, revealed that close to 1,000 funds carry a higher fund cost on the clean share classes.

Of 736 that are currently subject to a temporary rebate while negotiations continue on a preferential rate for the platform, 704 will be more expensive when this rebate is taken away in January. A further 261 funds that are not subject to the rebate are more expensive.

Standard Life head of adviser platform proposition David Tiller blamed fund groups for the rises, saying they appeared to be defying the spirit of FCA guidance which said fund groups should not use the switch to clean to boost margins.

Seven Aberdeen fund share classes were among the top 20 that are currently subject to the temporary rebate and that will show biggest price hike when this is removed.

In their bundled “A” incarnation both the income and accumulation classes on the Aberdeen Emerging Markets, Aberdeen Ethical World and Aberdeen World Equity funds, as well as the Aberdeen World Growth income share class, carried a fund charge of 1.5 per cent, which was cut to 0.6 per cent after a 0.9 per cent rebate.

On the Standard Life platform, the funds paid an extra 2.5 basis points rebate to bring the cost down further to 0.875 per cent.

In their corresponding unbundled ‘I’ versions however, each of the funds will charge a standard 1 per cent, increasing the fund group’s margin by 0.4 per cent.

A spokesperson for Aberdeen Asset Management said the new pricing brings rates into line with those funds elsewhere in the world, and said it is “up to clients to decide in the end if they want to pay the fee or not”.

The spokesperson said: “Aberdeen, as with other fund groups, could not look at [the Retail Distribution Review] in isolation but had to consider it with regards to the broader global business and existing models.

“When determining the unbundled, manufacturing price, the existing institutional class was a key consideration, especially for the UK funds where we intend to use the existing ‘I’ class as the RDR class.

“For many of our funds, the ‘I’ class was set at 1 per cent consistent with that levied on similar Aberdeen managed funds sold elsewhere in the world.”

The spokesperson added that in some instances fund AMCs are actually being lowered to 0.75 or 0.5 per cent.

Neptune Investment Management, which manages funds that account for 10 of the top 20 price rises once the Standard Life rebate is removed, acknowledged that some clients could face higher prices but argued this is due to “preemptive” action by the platform as fund groups transition their range.

Neptune Russia Special Situations fund’s accumulation share class represents the largest single price rise, with the fund cost increasing by a full 1.05 per cent in its unbundled version.

A spokesperson for Neptune said: “In response to the changing distribution landscape, Neptune has launched clean share classes... across a number of funds, but they are not currently available across the entire fund range.

“For funds where we do not yet have these available... we are making available our lowest priced share classes.

“In some instances we recognise that preemptive actions to forthcoming regulatory changes have resulted in a de facto increase in a fund’s gross annual management charge and therefore an increase in the cost of investing as represented by the [total expense ratio].”

Neptune said the price increases would ultimately be mitigated by new cheaper clean share classes when they are eventually launched.

Seven Investment Management echoed the case previously made by Artemis by saying it had been forced to squeeze its rates in order to to business with the larger “fund supermarket” and insurance company platforms.

Several 7IM funds on the Standard Life platforms have jumped 0.25 per cent in price from a previous net-of-rebate 0.65 per cent to a clean 90bp fund charge. However, the firm said this is a fund supermarket-specific rate and that the new pricing mirrors the cost on wrap platforms.

Justin Urquhart-Stewart, one of 7IM’s cofounders, told FTAdviser: “It’s a matter of going through this change away from fund supermarkets and insurance companies that had pricing structures that created all sorts of anomalies.

“If we end up with something that’s clearer and cleaner then I think that’s better but we have to go through the pain of this change.

“The cost is always 90bps. We have been squeezed down by the leviathans just to play ball with them.”

Unicorn Asset Management told FTAdviser that although there is currently a 0.5 per cent gap, the company hopes to bring prices down on those funds with the launch of new share classes.