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Methods of ditching legacy share classes

This article is part of
Guide to the Sunset Clause

Platforms will no longer be allowed to derive income from fund manager rebates, within a ‘bundled pricing’ structure from April 2016.

They all have to ensure that clients have been moved over to explicit charging.

Platform providers should provide easy to understand breakdowns of their charges to help advisers get to grips with new charges, says Alistair Wilson, head of retail platform strategy at Zurich.

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He says it is important advisers decide on the types of structures they do not like, for example, those that may restrict a client’s ability to move from one platform to another because of exit charges, and develop their client and platform engagement from there.

Judgement calls will clearly have to be made as to what share classes will wash well with an adviser’s clients.

The FCA has stated that platforms must make sure clients are not disadvantaged when converting to unbundled shares.

Barry Neilson, business development director at Nucleus, says there needs to be a thorough analysis that clients are not worse off financially as a result of converting to clean share classes.

Mr Neilson says: “Advisers should question platforms on their range of available clean share classes and also their processes for converting to them.”

The main issue of calculating the cost of retail share classes is the unnecessary tax charge they create for clients, says Paul Boston, sales director of Novia.

Mr Boston says the charge costs of the sale and purchase of units is about 26 basis points for high rate tax for a balanced portfolio. There are two approaches to dealing with conversion, according to Mr Boston - piece meal or bulk conversion.

He argues bulk conversion is the only viable way as it ensures clients avoid dual pricing.

Mr Boston warns he recently saw a fund that had a 5 per cent spread as a result of a piece meal approach to tackling legacy share classes.

He argues only bulk conversion can avoid any nasty surprises in the future when a system mistakes a conversion as a switch.

Mr Boston says: “The former is not capital gains tax liable but the latter is.”