It is one of those quotes that I keep in mind when confronted with the challenges presented by the retail distribution review. This time it is the thorny issue of clean shares classes and whether they represent a better deal for the client or not.
Certainly the move to “clean funds” has been propelled to the top of the problem list by HMRC when it announced on 25 March that it will tax cash rebates back to clients after 6 April 2013. Investors therefore will have to pay basic or higher rate income tax on that money in the future. Not a situation that many clients will find palatable.
The announcement has also led to many businesses expressing the view that rebates are as dead as the proverbial parrot and has arguably sped up the inevitable process of platforms and others offering clean share classes or alternative pricing structures as a matter of course to reflect this new reality.
But is there another more fundamental aspect to this debate? If we believe that the RDR is about improving outcomes for the consumer we have to be mindful of the debate that is forming around the question of whether clean share classes actually do offer better value for clients. This is particularly relevant for Sipp and Isa investors as cash payments into either of these vehicles will remain tax-free and investors will be able to retain tax-free rebates for as long as they remain invested in these tax wrappers. So what are the arguments?
For fund managers that are offering clean share class funds they are buying into the key thrust of the RDR which is, of course price transparency for the consumer. In this instance we are looking at where the annual management charge of a given fund is kept very separate from the platform fee and, so the argument goes it allows investors to see exactly what they are paying for and to whom. With the recent HMRC announcement we effectively seem to be seeing a pincer movement from both the regulator and the taxman to remove rebates from the scene. However, from a Sipp investor perspective there is no tax consequence on the cash rebates. It is then an argument around whether this push towards greater transparency actually offers an improved client outcome and therefore true value for money? Some commentators argue that the pre-RDR regime of rebates actually worked in favour of the client. For example, take XYZ fund which has a standard annual management charge of 150 basis points. The clean share class has an AMC of 75 bps which has to look good. Or does it? Large platform providers have negotiated larger rebates with fund management groups, so that the bps cost to the investor is actually lower than the bps charge on the alternative clean share class.
Good for the investor, less good for the institutions. The cynic in me might be led down the path of thinking that fund managers are keen to launch clean share classes as a way of clawing back some of the discount they negotiated away in the heady days before the RDR juggernaut heaved into view.
So, we seem to be in a position where, as ever it is “events dear boy, events” that is causing some people plenty of headaches. We are potentially faced with the situation where, as the FT neatly summarises the “plans to make fund investment more transparent could end up costing investors more.”
Indeed the platform search provider Adviser Asset is reported to have found that in an analysis of 1317, so-called clean fund shares “two-thirds could be purchased at lower prices in share classes that include fees”. How can that be? Could it be the case that the regulator in its quest for transparency for the consumer has forgotten or ignored market forces, where the sheer purchasing power of the platform providers was able to negotiate bigger discounts and ultimately a better price for their investors than what is available with the alternative clean classes and, as discussed earlier for Sipp investors where the tax argument is not relevant. This question of value is of real significance and importance.
Ultimately, market forces will work their way into this new post-RDR world with many advisers and commentators convinced that costs will continue to come down as competition from fund houses inside, as well as from outside the UK will be looking to buy market share and part of that strategy will inevitably circulate around cost as well as proposition. It may also be that the platform providers themselves come under increasing price pressure and these businesses may have to drop their margin on clean share classes that will swing the pendulum further back in favour of the investor.
We all know from past experience that the regulator, as with politicians will follow the path of least resistance and the argument for greater and greater transparency for the consumer will mean that the clean share classes are here to stay. For better or for worse, they will continue to grow in number and the big platform providers are already tracking up this growth curve. How it ultimately plays out for the consumer is perhaps a question that for the moment there can be no definitive answer but a watching brief is advised. As with most things in life there will be winners and losers. It does however prompt me to, once again, quote Woody Allen, when he said: “What if everything is an illusion and nothing exists? In that case, I definitely overpaid for my carpet”. Now there is a thought and just maybe RDR is all a dream.
Carl Lamb is managing director of Almary Green
