More clarity over charges is needed

Having different share classes available to invest in is nothing new, nor is having different structures for the underlying funds.

With no consistent naming convention for share classes, and having some commonly used terms meaning different things to different companies, how can this area of the industry become clearer for advisers and clients and what is the impact – particularly around reregistration?

With the levels of new business flowing through platforms into mutual funds, assets are finding their way into bundled, clean or ‘super-clean’ share classes. And while the regulator has been clear on the direction of travel it wishes to see the industry take – with improved clarity for investors – we are not quite there yet.

So what do the different share classes mean?

The costs of bundled share classes cover ongoing fund manager charges and expenses, including a cost (rebate) for the platform provider that may or may not be passed on to the customer.

Units held before the RDR may also include an element of trail commission for advisers.

Post RDR, in light of regulatory changes, how platforms deal with bundled share classes varies.

Many platforms reinvest the rebate into the cash element of a customer’s plan, while others retain the rebate to fund their platform services, for now at least.

Through a number of policy statements, the regulator has introduced greater disclosure of charges, leading to the costs of units being unbundled. In other words, fund management charges and any rebates paid to platforms must be separately identified and disclosed to customers.

This has certainly created better understanding.

As has been well documented, the reinvestment of the rebate into a cash element of a client’s plan is no longer permitted from April this year – for new money at least.

At the same time, platforms will be unable to retain the rebate for themselves – again for new money.

In the first quarter of 2013, HMRC issued guidance confirming the rebate, whether made as cash or reinvested as units, could give rise to an income tax charge for the investor. Therefore, the launch of new units has gathered pace as more fund houses have launched new share classes, referred to as clean share classes.

This has been followed by super clean, which, put simply, is a version of clean with a lower cost, issued under a different share class that is not available to every platform provider – an important point for reregistration.

One thing is certain: share classes are certainly more straightforward for investors to understand, supporting greater transparency. And with no rebate included in the price, there is no consideration needed of any tax implications

So where is the industry now?

It has been on quite a journey and has undoubtedly made great strides in reducing complexity. But with many fund groups making clean and super-clean share classes available, it is important we do not muddy the waters and interchange terminology, inferring the likes of unbundled and clean are seen in the same light.

Some argue that a unit is clean if the rebate has been reinvested. But just because a rebate is no longer retained by the platform provider does not make it clean.

The challenge is that the lower cost is sometimes derived from fund managers providing a larger rebate that is reinvested – so not necessarily clean – which opens itself up to potential tax liabilities for the customer.

So even a clean share class in the eyes of one platform may not be clean in the eyes of another if they have secured a rebate.

Advisers need clarity so that they can offer the best investment options to their customers.

The regulator has been clear in its drive for transparency and the benefits this brings to the customer.

We, as an industry, have without doubt come a long way in demystifying the world of investment and the charges customers pay, although it is clear we have some way to go.

We need a consistent naming convention, and for those offering super-clean share classes, they must also offer the more common clean share class to facilitate reregistration when customers wish to move assets between platforms

Alistair Wilson is head of retail platform strategy at Zurich

Share classes: super clean gathers momentum

What do advisers and clients need to keep in mind?

Alistair Wilson, from Zurich, suggests: “Super-clean share classes, for example, can drive down unit costs for customers, though consideration needs to be given to the total cost of investment. The availability of super-clean share classes can also present challenges for customers who wish to move assets on to a new platform that is unable to offer the same share class.

“As the industry moves towards more flexible retirement arrangements next year, this issue is likely to gather momentum, with customers having greater choice of where to invest their assets. It is important, therefore, that advisers ask how platforms are dealing with rebates, super clean and the like, as the terms being used across the industry mean different things to different people.”