The build-up to the retail distribution review, which came into effect on 1 January 2013, lasted many years and became increasingly frantic the closer we got to this date.
Much of the comment was to the effect that we were about to experience enormous change, and indeed, many commentators were predicting doom and gloom, with drastic reductions in the number of advisers, among other things. One thing that began to emerge was that the secret kick-backs enjoyed by many of the big institutions offering platforms, were about to disappear.
These kickbacks came in two forms, either in bundled offerings, where the deals they benefitted from were bigger than those of many of their rivals, or, in supposedly unbundled platforms, some of the bigger players – surprise surprise, the life companies – were pocketing part of the rebate and passing only part on to investors. As it became clear that these comfortable – and secret – arrangements were about to disappear, the institutions began to think about how they could leverage their size against the newer and more efficient players that were grabbing market share.
So along came the idea of the superclean share class. This is the concept of a clean (non-rebate) share class, but at a lower price for certain platforms than the rest of the market. You may recall certain platforms boasting about the deals they were about to announce that would take the market by storm.
After much talk lasting many months, possibly even years, and claims by some platforms that they had achieved exclusive terms for themselves, the whole issue of superclean seems to have disappeared from the agenda, at least for the time being. Despite all the hot air and waffle about getting the best terms for their customers, the real agenda – let us face it – was to get better terms for themselves, the platforms, so that they could gain a marketing advantage and squeeze the competition out of the market.
The first platform – based in Edinburgh, I recall – to proudly announce its schedule of superclean deals did so in the summer of 2013 after months of build-up, massive hype and promises to the market. However, when you actually looked at the detail of what they had achieved, the reality was very different from the hype, and they really had not achieved much at all by way of special terms. The whole thing immediately became a damp squib, and they were left very red-faced. Nothing much has happened since then, either from them or anyone else, to the extent that the topic has more or less completely disappeared from public view. The only exception to this is where organisations with both fund managers and platforms in their groups give special terms to themselves.
Why did it all fall so flat after so much hype? The reason is that in the end the fund management industry in general saw sense. They came round to the conclusion, which really was obvious right from the start, that offering special prices to some customers (platforms) meant that, in the end, that price would become the standard rate in the entire market. For a start, all the other players in the industry would demand the same price, or they would boycott the fund managers discriminating against them; or in the end the favoured platforms would succeed in squeezing the competition out of the market. M&G recently announced that this was the conclusion they had reached, and given that they would ultimately have to draw the line on price somewhere, they were drawing the line at the current rates and would not be getting involved in superclean pricing at all. It would now seem that other fund groups have decided to follow this line.
Those platforms demanding the best terms for themselves liked to compare themselves to the big food supermarkets getting special terms for bulk-buying from their suppliers and forgetting to mention that once those terms had been gained, the suppliers would have the life squeezed out of them as well as the competition. The fund groups should take heed and take care not to sleepwalk into a nightmare they cannot get out of.
Fund managers have also come to realise that platforms generally – and exclusively so in the IFA market – do not direct cash flows into funds, it is essentially done by the advisers and discretionary fund managers. And the message from fund managers to platforms often, is that if they want superclean deals then they should segregate deals to those distributors who can direct volume cash flows into the affected funds. This is the pattern we are beginning to see and it makes perfect sense.
You also have to wonder at the ethics of what seems to be going on behind the scenes. Some major platform institutions seem to have been offering to move large blocks of money from their legacy books of life and pensions business over to a fund manager in return for superclean prices on their platform business. In other words, moving one group of clients’ money – legacy client money – to fund managers in an attempt to get better deals elsewhere in their business to the benefit of another group of clients – new platform investors – and, of course, to the platform owners themselves. This in reality is playing with clients’ money for their own commercial interests.
Looking now at advisers’ reactions, all the research I have seen or heard about, often from competitors, tends to come to the same conclusion, namely that IFAs have no interest whatsoever in the topic of superclean share prices, and this is due to the fact that such deals have so far had a miniscule and practically irrelevant impact on total investor portfolio cost. We are also seeing a big rise in the amounts of money going into things such as passive funds and investment trusts (where sales were reported up 112 per cent since the implementation of the RDR), and price deals on these assets do not exist in the market. Granted, sales volumes of these types of assets are still relatively low, but their growth trend further reduces the impact of superclean price deals.
So, while in the short term the pressure to do superclean deals is off, no one is complacent, and it does not mean the issue of superclean deals has completely gone away. However, I do think we will see an increasing emphasis on deals being done for the end distributor, and the role played by platforms will be in facilitating these deals, not deals for the platforms themselves.
Bill Vasilieff is chief executive of Novia
Key points
* One thing that emerged from the RDR was that the secret kick-backs enjoyed by many of the big institutions offering platforms were about to disappear.
* The reality of superclean share classes was very different from the hype, and the first platform to publish had not achieved much at all by way of special terms.
* Fund managers have also come to realise that platforms generally do not direct cash flows into funds.
