At face value, so-called ‘super clean’ may appear to offer better value for clients on some platforms with the promise of a reduction in charges.
However, it is important to ensure any cost comparison takes into account all the charges that apply to your clients’ investments.
While the RDR reforms have helped to deliver transparency in terms of pricing and increased the prevalence of lower charges, there has been a lot of discussion in the news this year about who has secured what discount via ‘super clean’ share classes – those that are free of rebates to platforms and trail commission for advisers.
In spite of what the headlines would lead you to believe, there is another value dimension to be considered.
We believe it is important to focus on the total cost of ownership (TCO) because that is the amount that should determine the best outcome for the investor.
Mark Polson, principal of the Lang Cat independent consultancy, rightly pointed out in a recent blog that the annual charges should not be used in isolation to assess fund charges.
The idea that the annual charge exists as a simple mandate to calculate the cost-effectiveness of a fund can be misleading.
This is because in some cases, depending on where it is purchased, the combined cost of investing means that the TCO could potentially be more on a fund with lower annual charges.
Assessing the TCO is arguably the most accurate way of gauging value for the end investor. There are four key components to use when working out the true cost of investing, comprising the platform, wrapper and adviser fee, as well as the fund manager’s ongoing charges figure (which includes the annual charges and other operating costs, such as the fees paid to the trustee, auditor and regulator).
A TCO figure can be simple to calculate and is an easy way to understand the overall cost associated with your investment. Sometimes there is little point buying a less expensive share class, as the TCO for investing may be higher when other charges are added.
Some may argue one-dimensional reporting undermines the important points of costs and value of an advised investment.
Trying to compare value for money on ‘super clean’ pricing using just annual charges distorts the bigger picture and can be a bit of a red herring.
Instead, advisers looking to improve the lot of the end investor should always look beyond the headline rate for better guidance to understand what they are investing in, at what cost, and to do so with confidence.
It is important to consider the TCO in the selection process because at the end of the day, having access to ‘super clean’ pricing is only valuable if it actually results in cost savings for the investor.
Stephen Wynne-Jones is head of marketing at Cofunds
