I appreciate that the ongoing debate about new post-RDR fund share classes is creating unwelcome confusion for advisers. It is important for platforms to help demystify the terminology so you can determine the best solution for your clients’ needs.
‘Clean’ and ‘unbundled’ fund share classes are identical twins for re-registration purposes. The term ‘clean’ was coined by those platform operators who are unable or unwilling to offer unit rebates under the RDR rules.
It is meant to reflect the bare fund annual management charge (AMC) with any previously available rebate removed – or cleaned out. The term ‘clean’ favours the idea that a ‘clean’ fund is somehow better than one that pays unit rebates. In terms of client outcomes, this is potentially misleading.
At Skandia, we refer to these funds as ‘unbundled’. We feel this name more accurately describes this type of fund because they no longer include the adviser and platform charges in our existing ‘bundled’ share class. The term ‘clean’ would be misleading because we believe further rebates are still available. We will continue to negotiate a discount on the AMC wherever possible.
We have already added more than 1,000 unbundled funds to our platform and the majority of them offer rebates, typically approximately 8bps. We continue to add roughly 100 a week.
If your clients have tax-advantaged investments in wrappers such as an Isa, pension or bond, they are not affected by the HM Revenue & Customs ruling that fund rebates must be taxed. Only rebates in unwrapped investments are liable for personal tax. In such cases, even higher rate taxpayers will still pay less for unbundled funds with rebates than they would for ‘clean’ versions.
Our own research has shown the majority of advisers will want the cheapest solution for their clients, regardless of which option it is, and as it stands, unit rebates are still the best way of offering that.
But watch this space – the emergence of the ‘super clean’ share class could change things. This is the term being used to describe funds with the absolute lowest possible AMC, which is particularly advantageous if a platform does not offer unit rebates.
In summary, when the phrase ‘clean’ is used, it is referring to what can now be viewed as the ‘standard’ price, but there are, and will be, a number of discounted prices available, whether via extra units in your clients’ funds or the lowest possible AMC.
Central to all of this are client outcomes, just as with all the advice you provide. Rather than bulk-switching clients into a particular share class, we are providing advisers with the information to make the choice for the optimal client outcome.
In that context, and with a focus on pricing alone, the concept of total cost of ownership is rightly acknowledged as the optimal method of comparing investment costs post-RDR.
Platforms need to show what their product and pricing model will be, come April 2014. They also need to communicate if there is work to be done to be compliant, and how this will be delivered.
Peter Mann is managing director UK at Skandia
