Speaking at a Morningstar briefing yesterday (February 18), Andy Pettit, director of policy research at the data analysis company, said there was a “huge amount of money” invested in so-called legacy share classes which pay trail commission to advisers.
But he predicted the Financial Conduct Authority’s new assessment of value report rules would put the spotlight on this, encouraging fund houses to shift investors and their assets into newer share classes and putting an end to a substantial drip feed of adviser income.
The proportion of funds still in commission-paying pre-Retail Distribution Review share classes has been steadily declining over the past seven years but a hefty 24 per cent of assets still remained in those classes in 2019, according to data from Fitz Partners.
The value rules — which have been in effect since the start of 2020 — require asset managers to carry out assessments of their performance, costs, economies of scale, comparable market rates, services and share classes every year.
Mr Pettit said: “A number of groups are starting to transition from the legacy share classes into the current classes. There’s a huge amount of money invested in those legacy classes but asset managers are moving away from this.”
Mike Barrett, consultant at the Lang Cat, agreed. He said: “Asset managers are definitely looking at the share class side of things [in their assessment of value reports].
“The value of assessment rules make asset managers establish whether their customers are in the cheapest version of the funds.”
Portfolios in pre-RDR share classes often come with costly fees for investors, partly because of the commission element. And there are already signs that asset managers are keen to get their clients out of those assets.
Rathbones’ assessment of value report, published this month, reported the asset manager had moved investors who held a legacy share class into a current share class with a lower annual management charge. Meanwhile, Vanguard’s report boasted it had no clients lingering in pre-RDR share classes.
Rathbone Unit Trust Management’s chief executive, Mike Webb, said: "The asset management market requires fund managers to ensure that investors are in the most appropriate share classes. All asset managers should therefore be reviewing their investor base on this basis."
Speaking at the same event, Jonathan Miller, Morningstar’s director of manager research, said ‘orphan funds’ were also likely to see the chop as asset managers prepared their assessment of value reports.
So-called orphan funds are typically smaller funds with persistently low inflows and often high charges. Such funds have been criticised for being ‘dormant’ and therefore performing a disservice for those investors with cash in the portfolio.
As at the end of 2018, UK investors had £3.6bn invested in roughly 200 funds which fitted Morningstar’s orphan fund definition — funds which had failed to receive inflows of more than £86.9m over five years.
But Mr Miller said this figure would decrease over the next few years as asset managers axe the funds revealed not to be providing value in their assessment of value reports.
He said: “It will be the smaller funds that have been around a long time that go [as a consequence of these reports]. The funds are probably not performing well. They will be the biggest casualties of the reports.”
Mr Barrett thought this was a reasonable assessment, adding the mere fact there was an assessment of value forced asset managers to have these sorts of discussions on an annual basis.
He said: “They will be forced to ask themselves ‘is this value for money?’ and ‘is this sustainable from a business perspective?’.”
Mr Barrett added there was a “trade off” in some of these decisions as investors and asset managers should be investing for the “long term”. He thought it was a bad idea to cull a fund because it had “one bad year”, but noted this was a different scenario to a typical orphan fund.
imogen.tew@ft.com
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