PlatformsMay 1 2013

Lower-value clients lose as unbundled shares drive up costs

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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.