Investors get ‘50% discount’ moving from legacy share classes

Investors get ‘50% discount’ moving from legacy share classes

Asset managers have moved investors out of legacy retail share classes in response to the watchdog’s ‘assessments of value’ rules, resulting in an average discount of 50 per cent for investors, research has found.

Fitz Partners, a fees and expense research specialist, found that retail investors who had invested in about 600 fund products have now been moved to cheaper classes which do not include a trail commission, making up just over half of all fund products with a remaining legacy retail class.

Comparing the management fees charged before and after the move into new or existing clean share classes, the firm found the discounts received by investors ranged from 24 per cent to 67 per cent, with the overall average discount at just under 50 per cent.

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According to Fitz Partners, the transfer of legacy retail investors to the corresponding existing clean share classes offered the largest discount at exactly 50 per cent. 

When investors were moved to units offered specifically to asset managers’ direct investors, defined by Fitz Partners as ‘clean direct’ share classes, the average discount from previous legacy retail classes was smaller, at 40 per cent.

Hugues Gillibert, chief executive officer of Fitz Partners, said: “Over half of asset managers have actioned an automatic transfer of retail investors into cheaper fund units following the first round of assessments of value and most of these investors would have seen their fees halved. 

“It might have taken some time to come but it is a very positive industry trend, one which will benefit the UK retail investors.” 

He added: “It is still very much a work in progress, we see announcement and resolutions impacting existing legacy retail investors almost at the rate of AoV publications. We certainly expect to see more happening in this second year of Assessment of Value.”

The FCA's value for money measure, implemented in early 2020, ensures that managers carry out assessments of their performance, costs, economies of scale, comparable market rates, services and share classes every year. 

This has shone a spotlight on legacy share classes which pay trail commission, putting pressure on the substantial drip feed of adviser income.

As part of the FCA requirement, managers must take corrective action if an investment does not offer good value to an investor.

Speaking at a Morningstar briefing last year, Andy Pettit, director of policy research, said there was a substantial amount of money invested still liable to pay trail commission to advisors, but this was beginning to change.

“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,” he said.

Minesh Patel, chartered financial planner and director at EA Financial Solutions, said cost reviews from advisers, platforms and managers were ‘vital’ for the industry’s regulatory and commercial interests.

He welcomed the significant discount and said the findings “further highlight the need for advisers to review older contracts and the benefit of moving their clients into newer shares classes and also demonstrates the value-added, often used and cliched, by advisers.”