Lower-value investors are likely to face a higher total cost of investing as platforms make the shift to ‘clean’ share classes, as new data show that the ultimate cost to clients with less than £100,000 invested through Cofunds have risen since the platform dropped bundled pricing last year.
According to data relating a broad portfolio of 19 funds held on Cofunds, compiled by a financial adviser and seen by FTAdviser, the end client is paying a higher total investment cost for 18 funds since the platform’s move to ‘unbundled’ pricing, once adviser charges and platform charges are factored in.
Cofunds has led the way in the trend towards using clean fee share classes by moving to a completed unbundled model in 2012. The firm recently announced it would have 3,000 such share classes available by July.
Under the company’s charging model, a 0.29 per cent platform charge is applied for investments up to £100,000, which then drops to 0.26 per cent up to £250,000, 0.23 per cent up to £500,000, 0.20 per cent up to £1m, and 0.15 per cent for investments of above £1m.
Of the 19 funds in the representative portfolio, nine are between two to four basis points more expensive on a total cost basis.
In order to enjoy a total cost of investing in Cofunds’ unbundled model equal to or lower than that of its previous bundled model for these funds, an investor would have to have a pot of at least £250,000, suggesting higher-value clients are the winners of the move to clean fees.
Many funds reduced their annual fund charge by at least 75bps, compensating for the 50bps typically paid as commission and 25bps which would otherwise have gone to the platform as a rebate.
In other cases the difference is much more significant, with fund managers often pocketing a higher margin from their unbundled share class.
The M&G Optimal Income fund, for example, costs 0.3 per cent more under the unbundled pricing model, with the total cost of investing - including a 0.5 per cent adviser charge and 0.29 per cent platform charge - standing at 1.7 per cent, compared to 1.4 per cent previously.
A spokesperson for M&G pointed out that the unbundled share class, which carries an annual fund charge of 0.75 per cent and a total annual management charge of 0.91 per cent, was launched six years ago and that therefore the firm has not hiked its margins in response to the ban on rebates.
Yesterday (30 April), Artemis sales director Tony Van Gool told FTAdviser platforms had stronger negotiating clout using bundled share classes, forcing fund group to settle for smaller margins.
One of the funds in the portfolio is the Artemis High Income Fund, for which the total cost of investing has risen for a sub-£100,000 investor from 1.34 per cent to 1.49 per cent.
The unbundled share class for the fund, launched five years ago, carries a total AMC of 0.7 per cent. Mr Van Gool confirmed the firm was taking 0.5 per cent from the bundled share class, which he said was a result of the firm needing to stay competitive.
A spokesperson for Cofunds said: “We have over 2,700 clean share classes on the platform, a number that is growing each week. The cost of investing in 80 per cent of those clean share classes is exactly the same as it was for the old bundled fund. For a further 10 per cent it’s actually cheaper.
“Policy Statement 13/1 is unequivocal in its stance on fund managers using the move to clean to hike prices up - our experience so far points to only a handful of cases where this has happened.”
The Neptune Balanced fund also grew in price according to the data. However, this was due to a dramatic increase in ‘additional expenses’ from -4bps to 23bps.
Neptune explained this additional cost was due to the small size of the share class and would diminish as more units were created.
A spokesperson said: “Neptune launched clean RDR share classes across a number of funds on 2 October 2012. These share classes are now available on Cofunds with Neptune’s [bundled] share classes remaining open for legacy business.
“The issue of additional expenses... is purely a function of the current size of some of our new share classes. When the costs within these funds become absorbed by a greater number of units we anticipate the additional expenses to return to their historic levels.”
Many commentators have suggested the move to unbundled shares could result in lower-value investors paying more as platforms spread fees across their investor base in a less even fashion and ‘cross-subsidies’ are removed.
Tony Stenning, head of UK retail at BlackRock, said there would likely be “unintended consequences” of unbundling charges in that the “cross subsidisation” that used to exist in the market was removed, with directly-levied platform charges likely to result in lower-value clients paying more than they did in the past.
