I was surprised a few years ago when I met several senior management consultants who independently, in response to the initial RDR consultations, believed the greater part of post-RDR distribution would be ‘restricted’.
I have always believed that ‘whole of market’ would always dominate. And that is exactly the direction the market seemed to be taking, until recently. Certainly, among our own platform supporters there was negligible interest in restricted propositions. So what has changed?
The change has been brought about by the ‘super-clean’ share class debate. The opportunity to reduce the cost of investment by restricting the selection and thereby negotiating a lower cost from fund managers has captured the interest of distributors. Everyone is watching with interest the emergence of super-clean share class deals to see what can be done if sufficient muscle is flexed.
So far the wins are not very impressive: low additional discounts on funds that would not be at the top of most selections. The best possible terms will no doubt be negotiated by Hargreaves Lansdown. Approximately 75 per cent of its investment flows can be directed at only about 40 funds. When those annual flows are about £7bn, I can see the pressure on fund managers.
A discount guarantees commensurate growth, whereas fund selection can only be an informed, but not guaranteed, prediction of superior performance. Fund managers are hypersensitive to any undermining of their price proposition. They are very worried that agreement to discount will be the start of a slippery slope, with growing demands for discounts difficult to resist.
One issue that has so far not been addressed is that of what to do with discounts once the fund is deselected.
The provider/distributor will expect the discount to persist while the fund manager will wish it to revert to the standard share class if distribution flows are no longer assured. If special terms do not persist then the provider may have the additional challenge of holdings being switched to the newly preferred fund.
This may be why there are demands for super-clean share classes, rather than ‘super rebates’. It is easier for a fund manager to withdraw a special share class than it is to withdraw the rebate. It is also much easier for the platform to administer.
This is now likely to result in super-clean share classes being negotiated by many large distributors. Many were formerly ‘tied’ so the loss of the independent ‘whole of market’ label is seen as a tolerable price to pay for a guarantee of lower total investment cost.
So who will end up benefiting from this cost saving? History indicates that the end client may not always see a commensurate reduction in their ‘total cost of ownership’. The additional margin may be absorbed by the costs of running the distributor, which are likely to be higher due to the reduced size of investment typically held by clients of ‘restricted’ offerings.