We are beginning to see several platform providers start to make their move and declare their intentions public. It seems timely then to shine some light on these deals, and take a closer look at some of the associated issues.
Most recently, we have seen 7IM go public with amendments to its AAP fund range. With the cross subsidy ban in PS13/1, 7IM has been forced to go clean as it had previously waived any platform fee on its own funds. So it will now create a new clean share class with a higher charge. It will also build a superclean 7IM-only share class which is, yes, 25 basis points cheaper. Two ways of getting to the same result.
Let us take a closer look at clean shares for a moment. We know that it is a share class with the traditional 50bps trail and 25bps platform rebate stripped out leaving a fund charged at 75bps or thereabouts. Clean as the proverbial whistle. Except of course that I am not quite sure who was present at the Fellowship of the Ring industry gathering who decided that 75bps would be the standard bearer, and that anything less most definitely shall not pass.
Product providers and the adviser community have shouldered the majority of recent industry margin squeeze and with many of these funds undoubtedly costing too much, it is about time that fund managers absorbed some pressure too. They are big enough. This leads us nicely to – superclean.
Never mind the new norm of 75bps; let us find out how little we can get these funds for in the market and price to that. In principle, this sounds logical. But size matters, and some providers have decided that the best prices should be the preserve of larger organisations, using their commercial buying power to negotiate exclusive deals.
Standard Life has been the first to flex its muscles and offer us two tickets to the gun show by announcing exclusive superclean pricing deals for a range of funds from 15 fund managers. Full details are to be published in September but it states that the reduction amounts to an average 9bps. This feels ever so slightly underwhelming. That said, it should be acknowledged that this is the first move in what is likely to be a very fluid issue. And whatever you think about superclean, Standard Life has done well in getting its agreements in place.
It is as yet unclear how the mechanics of differentiating between these share classes will actually work.
A couple of potential strategies to emerge are hyperclean – pricing the share class similar to an institutional fund with a constant fund annual management charges but with an additional platform specific charge on top – and zero – similar to hyper but with only the platform charge.
There is a potential minefield in all of this, it relates to one of the most crucial outcomes of PS13/1- platform providers need to present their retail investment products without bias. All of them.
Now, if I had just negotiated totally megaclean deals on a range of funds, I would want my marketing teams to scream about it. But they can’t really, can they? Or at least, it is going to be extraordinarily difficult to do so without crossing the line. How platform providers walk this tightrope will be interesting, not to mention fun, to follow.
The adviser community too, will need to watch this like a hawk (as if you did not have enough to do) given that PS13/1 places the due diligence burden directly on your shoulders.
And that is not the only issue facing advisers. The deluge of fund changes brings the switchover from bundled to explicit platform and adviser charging, and how you deal with this into focus – probably in bulk. Do you use positive or negative affirmation with clients? How do you communicate the changes, especially for those unbundling from the traditional fund supermarket space who are used to paying no explicit platform charge? Hint: there is no guarantee that old and new propositions cost the same.
Interesting times ahead, and we really only are at the very start of it. Funnily enough, it does not feel all that clean.
Mark Polson is principal of The Lang Cat
Key points
- We are starting to see several platform providers start to make their move and declare their intentions public over clean share classes
- Product providers and the adviser community have shouldered the majority of recent industry margin squeeze
- The plethora of fund changes brings the switchover from bundled to explicit platform and adviser charging, and how you deal with this into focus
