Following the RDR, the FCA brought in new regulations intended to give consumers more confidence in the retail investment market.
Historically, investments paid advisers ‘trail commission’ which was included in a fund’s annual management charge (AMC). However, ‘clean’ share classes, with no trail, have been brought in. As a result, they have lowered the AMC from an average of 1.5 per cent to roughly 1 per cent.
In late October 2013, the FCA set out what it expects from advisers and platforms when transferring investors to pre- and post-RDR share classes. In its guidance consultation, the regulator says it would expect clean unit classes to be “exactly the same” as the pre-RDR class, with the only difference being the reduced AMC.
In the case of platforms specifically, in the FCA’s 13/1 policy statement released in April 2013, the regulator referred to the introduction of clean unit classes and announced the banning of payments to platforms from product providers. The rules come into force on 6 April 2014, with the rules in relation to any legacy payments to come into force on 6 April 2016.
Throughout this year, fund management groups and platforms have been introducing funds with ‘clean’ share classes, replacing the trail commission-paying classes. As of April 2014, commission-paying funds will no longer be available to new investors.
In response, many platforms have been changing their charging structures in preparation. FundsNetwork, for example, announced in mid-October that all new business onto the platform would be in clean share classes from 9 December 2013, with a £45 annual fee and 0.25 per cent service charge.
Synthetic performance
Additionally, ratings, data and analysis provider FE has developed synthetic performance histories for clean share classes. The idea behind the move is to enable IFAs and investors to be able to compare the past performance of funds of clean share classes to other funds on an equivalent basis.
Currently, clean share classes carry a typical AMC of between 0.75 and 1 per cent for an equity fund — the major advantage being that it is simple and easy to explain to consumers.
An exercise in futility
The RDR was meant to create a more transparent and cheaper investment world. But do advisers think that has been achieved?
For Simon Webster, managing director of Kent-based advisers Facts and Figures, clean share classes have purely been an exercise in futility. Before clean share classes, the revenue was split between manager and platform. But now, it still costs the same and is still split between manager and platform, he says.
The exercise has not changed clients’ opinions, either. “We have explained this to over 100 clients. We have genuinely yet to find one who cared or who thought it was helpful.”
The clients of Facts and Figures suffered due to the cost to the platform, fund management and advisory communities implementing RDR. “It has cost scores of man hours to do the switching at our firm alone; the complexities have been endless and it has added zero client benefit. Indeed our service standards have slipped as we have struggled to cope,” he adds.
He says “transparent” is now just the latest and “totally meaningless buzzword”. Only the regulatory purists and a few platforms whose model slightly favoured such a structure ever really thought this was a good idea, Mr Webster adds.
“When I buy a loaf of bread it costs, say, £1.50; either I think this is good value and I buy it, or I think it is not and I don’t. I really don’t care how much the farmer got paid for his wheat. I just want to know total cost and can I afford it?” he says.
The right approach
But not all advisers think ‘clean’ is just another buzzword. Clayton Cumming, independent financial adviser at Glasgow-based Advice & Wealth Management Solutions, says he thinks it is the right approach for the industry to be adopting. “I feel it is a positive move which endorses the RDR spirit of transparent charging. With this in mind, it means clients will know exactly what they are paying for as well as avoiding the forthcoming tax liabilities on rebates,” he says.
However, he says there does seem to be some confusion remaining as to the best outcome for clients as some charges involved for moving to clean share classes can be more expensive. Only time will tell, he says. “Some providers have been active in mailing customers, but for me, I deal with every client on a one-to-one basis to look at what the best outcome is.”
Public is in the dark
Kim Barrett, an independent financial advisor at Hertfordshire-based Barretts Financial Solutions, agrees clean share classes are a step in the right direction, but says the problem he has comes down to the regulator. “The FCA currently and the FSA previously have woefully failed to promote RDR and the general public is completely in the dark about it.”
He says the FCA’s adopted attitude is the problem, as the regulator does not feel it needs to educate the general public.
“It is all very well making these changes to fit in with a fee-based environment, and share classes without any element of commission follow that trend, but the general public does not have a clue what is going on,” he adds.
Mr Barrett continues, “As we actively manage clients within our wealth management service, whenever we recommend funds we will undoubtedly move clients into new funds that are of a clean share nature.”
He thinks the general public views adviser charging as an “add-on cost” and does not appreciate that the fee replaces commission. “In many respects, a move to clean shares classes will undoubtedly prove costly to the half-hearted IFA who thinks they can swan their way through RDR without any game plan,” Mr Barrett says. “Bring on clean share classes as another great leap into the truly RDR world.”
A part of the story
Jason Butler, chartered financial planner and wealth manager at Bloomsbury Wealth, says anything that makes the explicit fund costs clearer and more transparent is a good thing for investors.
He says while some individual clean share classes may not be cheaper than some old ‘bundled’ funds, in the fullness of time, clean will come out cheaper on average as platform and advice costs are stripped out.
“Clean share classes are just part of the story and investors — and their advisers — need to look at a range of implicit fund costs as well,” he says. These include the effect on performance of turnover of underlying holdings, retention by the fund manager of income from stock lending, and the spread that arises from buying and selling.
He says he thinks the typical 1 per cent bundled advice fee is looking “very shaky” and once clean funds are the norm and custody charges fall, the next area to come under scrutiny will be the value of a 1 per cent advice charge. “I see the future as a fixed monthly or annual fee for the general financial planning service and a much lower — less than 0.5 per cent pa — charge for any associated portfolio management service,” he adds.
Creating a consensus
As with any new regulation or product, there will never be a consensus within the adviser community. Advisers need to agree with the regulator on what needs to be done. Having clean share classes is an inevitability that needs to be addressed to create true ‘transparency’ within the financial community.
Now is the time for the adviser community to pull together and be in agreement that transparency is needed more than ever. Especially following the Arch Cru scandal, payment protection insurance mis-selling and the Keydata failings. Ultimately, advisers want the same thing — for their clients to get the best from their money and to do so safely. While some advisers think each new ruling is just another pointless exercise from the regulator, we should all be reminded of the old cliché that it is better to be safe than sorry.
However, once clean share classes are well under way, every adviser will be asking what the next hurdle set up by the regulator will be.
