FOR & AGAINST: Conversion to clean share classes

It was recently announced that one platform will be starting a programme of share class conversions from the current, rebated share classes to what have recently been coined ‘clean’ shares.

This process has already begun and will be completed by April next year. Converting clients automatically to clean share classes removes all the paperwork and responsibility for switching away from the adviser.

In our view, automatic conversions will create the most transparent approach for both the client and the adviser.

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The alternative is to leave it to advisers to make a switch, and any platform opting for this route could be opening a logistical and operational can of worms.

The argument I hear being put forward for the “leave it to the adviser” approach is that some funds with rebates are cheaper than clean shares and some funds do not have a clean share class at all, which disadvantages the client.

The platform will convert the funds where ‘clean’ is no more expensive than the share class with a rebate.

It will provide the advisers with advance notice through online management information for the fund managers that have either increased the price or not introduced a clean share class, so they can look for a viable alternative.

This competitive environment has the effect of sharpening the senses and the pencil.

To not do this will put client, adviser and platform ultimately in a significantly disadvantageous position through the opportunism and procrastination of a handful of fund managers.

A recent blog could not have put it more succinctly: “Putting power in the hands of the advisers is all well and good, but also places a huge administrative burden [on them].

“We look after close to 600 clients and you can imagine they might have between 14 and 20 individual holdings.

“Even just writing to 600 individual clients and getting their permission to do a transfer from retail to clean would be a huge undertaking”.

One of the adviser firms I have discussed this with estimated it would take half a man-day per client to undertake this work. With 600 clients that is more than a year of paraplanning time which the client ultimately has to pay for.

The complexity has been further heightened with the recent announcement from the FCA allowing cash rebates on legacy investments.

These rebates are subject to similar ‘disturbance events’ as trail commission, and therefore will be turned off at client/investment fund level in certain scenarios. Without management information at a granular level there is a risk that advisers may not realise if clients are left in a non-clean share class after the ‘disturbance event’ that has the effect of stopping future rebate payments, when an alternative clean share class is readily available.

The result of this could leave the client in a position of paying twice, and the adviser could be exposed to a significant and unnecessary business risk.

The one last issue that has to be dealt with is that rebates in unwrapped investments, no matter how small, have to be taxed and could mean the client has to complete a tax return.