Are managers using unbundling to plump up margins?

Michael Trudeau

More evidence emerged this week suggesting clients could often be worse off by moving to unbundled funds.

FTAdviser revealed this week that although Standard Life has introduced a rebate (and is paying the income tax due thereon) on a number of unbundled fund share classes which would otherwise be more expensive than their bundled counterparts, these rebates are due to disappear early in the new year, exposing clients to higher fund prices.

Of the 736 funds that have the temporary rebate in place now, 704 will be more expensive when this is removed in December for FundZone clients and January for wrap clients respectively. Of these, 230 will be more than 10 basis points more expensive, while 43 are at least 30bps more expensive.

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Of the 20 biggest price jumps once the rebate disappears, 10 are Neptune funds. In one case, the Neptune Russia Special Situations fund’s accumulation share class, the difference is more than 100 basis points.

Not only that, but many of the unbundled funds which are not subject to the special ‘placeholder’ rebate are also more expensive than their previous ‘dirty’ forms. Some 264 clean share classes carry a higher fund cost that the previous post-rebate bundled option, with 121 more than 10 basis points more expensive.

Standard Life should be credited for its transparency on pricing. It has also said that more than three quarters of its previous discounts will be reflected in new, cheaper share classes by the end of the year, including half of those currently subject ot he temporary rebate. It expects most of the remainder to be in place by the end of March.

Moreover, it argues that it is not to blame for the hike, but that rather it is a reflection of fund managers boosting their margins by switching to (often existing) share classes.

This is just the latest evidence of an outcome FTAdviser first warned against six months ago, when it found that many of a sample of Cofunds funds would also jump in price when moving to “clean”. At that time we highlighted the issue that fund costs rises were to blame.

Artemis even admitted to us its margin was higher, saying competitive pressure had pushed costs down to unfair levels under bundling. Neptune said its higher costs were due to higher trading costs for smaller share classes, and that these would come down over time.

There are a certain number of qualifying points to make.

For example, the new tax on rebates will go some small way towards mitigating the difference between clean and dirty funds, and in many cases the amount clients will have to pay will be minimal compared to the adviser charge involved in running the comparison.

Still, this is significant given that advisers have been warned by the regulator not to switch clients where it would leave them worse off. Click here to read about how several advisers are approaching this conundrum.