Platform View: The complexity of switching units

A friend picked up a copy of a trade publication that was lying around my house and decided to flick through.

I was then required to spend some time translating the various terms and explain what was happening within the financial services industry. Explaining the RDR was reasonably straightforward, as was the concept of platforms and wraps.

But clean share classes were a much more complex subject. Throw into the mix a ‘super clean’ share class and how certain fund managers are looking to price their funds, and I had one very confused friend.

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He was most worried about the fact that his pension wasn’t invested in clean share classes. To him this meant that his pension must therefore be dirty. I explained that at some point his provider would move him to the new, super shiny clean share classes and he was reassured, but still slightly confused.

The FCA recent guidance consultation on share class conversions was meant to clear this all up. It was suppose to provide clarity to the industry on how this transition was to take place. But it unfortunately didn’t quite manage to do this. This is a complicated subject and one that needs careful consideration.

Firstly, the impact of charges. The fund management response to the move to unbundling has had a variety of impacts. The launch of new share classes has seen most funds being offered at an equivalent charge to those of the previous bundled version, although some have come in cheaper and some more expensive. The cost of the fund pre and post conversion is very important to understand from a customer point of view.

The cost of the platform also needs to be considered, since some platforms have decided to review charges. Depending on the client, this could result in the charges being greater or less than those currently paid. The FCA is therefore right that charges must be taken into consideration when switching share classes. This is an area where platforms need to be very transparent.

But the complexity doesn’t stop there. We are still seeing the transition from a commission to a fee, which means a switch of share classes has to occur at the same time as the move to fee-based advice. Therefore, the adviser must be in control of the switch.

The final issue is how the share class is actually converted. Until this year, fund managers didn’t have to support a move between different share classes. Now the whole industry is demanding to convert.

However, although some fund managers have built capability, many have not. This means that a customer switching units can get very different outcomes. There are no agreed service levels, the process is manual and there are lots of factors that need to be taken into account.

You then get differing approaches from platform to platform. Some are not converting, some are doing it in an all-encompassing bulk switch and some are doing it in phases that have created confusion.