Tell, me, does the advent of super clean fund share prices mean that so-called clean prices are, in fact, slightly soiled?
It is a serious question. If a fund is available at an annual management charge of 60bps, why would I pay 75bps? What am I getting for paying 25 per cent more? If the same 25 per cent were the difference between two platform charges, it would be a no-brainer.
In response to this question, some advisers have rightly said that only some funds give discounts, thus the differential across the portfolio is marginal. They are quite correct, at least for now. However, the game is ever-changing and Old Mutual has introduced a range of funds with an average AMC of 52bps.
The list of fund managers who have signed up is not too scruffy, including Aberdeen, Artemis, BlackRock, Fidelity, Henderson, Invesco Perpetual, JP Morgan, Newton, Schroders and Threadneedle.
Life, though, is never simple. The Old Mutual Artemis Income Fund is not the Artemis Income Fund, it just looks like it, a similar tactic to the mirror funds used in life products. Will they perform as well? There is no reason why not, especially with the advantage of a lower charge. Old Mutual has laid down a real and fascinating challenge to advisers.
So, where did it all begin? In the old days, before RDR 2 that is, fund managers paid the big platforms who operated bundled charging 25bps out of the AMC, ostensibly for administration. In addition, they paid rebates that were not from the AMC, which rewarded volume. A typical rebate might have been 7bps. This made an important contribution to margins.
All rebates, of course, were banned at the end of March this year.
That might have been the end of it, except that the big platforms that had offered bundled charging did not want to lose their edge, as generally their operating costs are larger than the smaller wrap platforms – and this is where the battle began.
They asked fund managers for better terms, to match the rebates they had lost. They could not benefit themselves, but hoped by offering better terms to their customers, they would benefit from increased volume.
Since nothing is simple, there are two ways of offering a discount:
- A lower AMC, for example, 60bps as opposed to 75bps.
- By offering a unit rebate (still amazingly allowed under the RDR), which could be converted back to cash in the customers’ platform cash account.
Both solutions have problems. Lower AMCs mean more share classes, the so-called super clean. This creates cost for fund managers and problems in providing historic and future data. It also increases complexity for both advisers and their clients. There are also problems when a customer moves from a platform that enjoys a special price to one that does not.
The unit rebate solution suffers from the little problem of being taxed in the customers’ hands unless within a tax wrapper such as Isa or Sipp.
One 2013 study – in conjunction with the International Financial Data Services – found that most fund managers saw platforms, per se, as distribution channels with no clout. An independent platform such as Cofunds cannot influence where business goes. Their IFA clients would be up in arms if they did.
A vertically integrated business is a different story. Standard Life has My Folio; Axa has Architas; Old Mutual has Wealth Select. The asset management business can influence flow if it wishes. Unsurprisingly, each of these has been able to negotiate discounts.
The IFA versus restricted debate has a new dimension. The more restricted the proposition, the greater the bargaining power of the providers. The value of an independent proposition is weakened if the fund prices are 25 per cent greater.
Buying clout has many faces. I have no idea how it might be leveraged but one might observe that Axa is globally a colossal insurer and asset manager; so is Zurich. US businesses such as Pershing (part of Bank of New York), SEI and Raymond James are far, far bigger than they might appear in the UK.
A further complication is that both asset managers and wealth managers are often global businesses. BlackRock, Invesco, Aberdeen and Threadneedle, for example, do business around the world. Barclays Wealth and UBS dwarf the vast majority of UK adviser firms. If a cheaper AMC is available in the UK, buyers of those funds will look for a similar price elsewhere. The last thing global fund managers need is international arbitrage, especially when there are very nice margins available in some of these other markets.
How will it all pan out? So far, we know that:
- Advisers are currently rarely tempted to change platforms for reductions on a minority of funds.
- Fund managers are influenced by distribution capability rather than size of platform, Neil Woodford’s new fund being a prime example.
- Significant reductions tend to be for mandates run by star fund managers or teams as opposed to the actual fund.
However, looking forward, there is a significant drift to restricted propositions, the biggest example being Sesame Bankhall Group, who have their own asset management business, Optimum.
Industry research has found that asset managers made their preference for restricted propositions when they not only know the level of inflow they can expect, but also the nature. The nature of money is important. A flow of lots and lots of small amounts that stick for years is far better than large sums that move in and out.
This brings us to the issue of discounts and rebates. One fund manager said to us in our research: “If you are talking promised levels of business on specific terms, it is beginning to look like a mandate. Mandates are not offered at a super clean price of 65bps or even 60bps, they are offered at institutional prices which might be more like 35bps”
How will IFAs react? There is already a significant drift to passive funds, which effectively eliminates the problem for those with this strategy. For those that recommend active funds, there is usually an alternative fund option. Thus, if fund A offers a big competitor a discount that is not available to you, you might choose to recommend the similar fund B.
As such, I do not expect high-quality financial planners to suffer in any way, certainly not in the short term. The same might not be the case for smaller, less sophisticated firms. If they are outgunned on both resources and price, their future must be in doubt. As I have said many times before, I do not see how small, inefficient firms’ resources and without succession plans can survive long in the RDR world.
Finally, there is, of course, the unknown unknown. On 20 April, an FT article carried the headline, ‘Fund managers fret as Facebook pushes into financial services.’
Margins in asset management are fat. There are too many fund groups and too many funds; there are few entry barriers to new players. This is a description of an industry ripe for revolution. Should one of the huge technology businesses choose to play, they would terrify today’s market. Lots of cash; no legacy; huge data resource and a love of customers. Too good to be true? I do not think so.
FCA chief executive Martin Wheatley recently suggested that advice can be fully automated, has the time come for a technology giant to have a look? We will just have to wait and see. The future will certainly be both challenging and exciting.
Clive Waller is managing director of CWC Research
