Let’s be clear – RDR is a good thing. But the issues it causes for platforms have not always been understood.
I disagreed with the cash rebate ban, but we have to get on with it. The ban was always expected to result in the adoption of clean share classes. The alternative of widespread unit rebating is not in the customers’ best interests generally, but especially not where tax is incurred on rebates.
There is no doubt the move to clean will happen – it’s just a question of how and when. We need to understand that a move from retail share classes to clean share classes for about 3,500 funds and 350 fund managers is a huge project, fraught with risk and loaded with cost that will not be recovered.
If you accept what I say above about unit rebates, then the move to clean share classes has to be achieved as soon as possible and preferably before the end of the fiscal year.
Why? Because, if we did nothing, after that date there would definitely be many customers who would be worse off than if they had been converted. We would then have a hasty switching process driven by clients and advisers that would put unwelcome pressure on platforms at their busiest period – tax year end.
We have now received a reminder of what we have to do to ensure customers are not disadvantaged if a bulk conversion of share classes is undertaken. However, we must consider whether they would be disadvantaged if we did nothing.
The risk that customers would be significantly worse off in April has to be assessed now. The result is that a substantial part of the industry will now move to clean share classes. That’s tens, if not hundreds, of billions of pounds moving across. This is something that has to be meticulously planned and scheduled with fund managers and their administrators.
The largest administrator is responsible for more than half of these assets. This project will take six months of highly planned execution. A serious disturbance to its schedule would threaten the whole undertaking. This is why platforms asked for so much notice for rules to be announced, so we could plan.
So what of the “super clean” debate?
The emergence so far of such share classes has been underwhelming. Fund managers offer special deals where fund flows can be influenced and usually only for funds not greatly in demand. The implications are that they realise concessions here will be difficult to control and a widespread reduction in annual management charges, total expense ratios and costs of ownership is likely to result.
This is obviously good for the customer, although I don’t think this will be the main influence on fund charges.
One of the main benefits of the RDR is adviser charging and that creates the level playing field for passive funds with both open-ended and closed-ended active funds.
Competition from ever-lower cost passives, especially in the main markets, will reduce fund manager charges for active funds. The RDR is having the effect the regulator wanted. Let’s try to enjoy it.
Hugo Thorman is chief executive at Ascentric
