Platforms to gain from RDR direct price disparity

The issue was highlighted again in the Daily Telegraph this Saturday (16 August), in a story on a couple who switched away from - or rather, rerouted their regular investment to - an Isa-wrapped fund managed by M&G to avoid sacrificing thousands of pounds.

By going direct they were paying the same bundled charge of 1.66 per cent they had been for a number of years, while if they invested through a platform they would have paid the post-Retail Distribution Review ‘unbundled’ rate of 1.17 per cent.

Based on their £300 a month contribution, and assuming average underlying fund growth of 5 per cent per year, the article states that over 20 years staying direct would produce £98,428, nearly £10,000 less than the £108,254 by going through the Cavendish online platform.

This counter-intuitive inequality, an incipient consequence of the RDR pricing shake-up, is one FTAdviser has cited a number of times.

In the aftermath of major platforms announcing their new pricing models, we exposed how thousands of advised investors were likely to pay more than they had under the opaque bundled option, in large part because the fund manager was taking a larger cut.

Strongly refuting claims of profiteering, one manager cited, Artemis, admitted it was earning more but that this was a more equitable distribution after years of being unfairly squeezed. M&G was also implicated, with the manager telling us that in the cases we had seen the ‘clean’ share class had been around for some time and thus it had not ‘hiked’ fees.

The Financial Conduct Authority had warned publicly it would seek to intervene if it saw evidence that fund managers were using the new rules to push up profits.

Of course, the Telegraph’s story does not mention the rates that the platform itself would charge. These can vary substantially and would take a sizable chunk out of the ‘gain’ made by going indirect.

Nonetheless, it is a useful reminder that in financial services it does not always pay to cut out the middle-man. M&G told the paper that the higher fee reflected the costs required to service individual clients; many will feel they are simply lining managers’ pockets.

My fond hope is that putting such issues under the spotlight will also focus attention on the relative value of intermediary services.

Recommenced hostilities between platforms is putting renewed pressure on managers to drop ‘clean’ share charges, which will serve to make the combined cost of going through an adviser able to find the most cost-effective route a competitive option.

That an adviser will be able to add value beyond simply saving a few pennies, surely makes it truly compelling.