Death of retail share class skulduggery

News that Old Mutual are due to make their fund for Richard Buxton ‘clean’ in terms of charges raises some important issues.

When you buy collective investment funds, you often buy what are known as retail share classes.

These incorporate within the annual management charge a fee for three separate components; the fund manager, adviser and administration platform.

From a typical 1.5% annual management charge, you might expect to see 0.75% paid to the fund manager, 0.25% to the platform and 0.5% to the adviser.

So far, so good.

Since the introduction of the Retail Distribution Review on 31st December 2012, which abolished the payment of commission to advisers, a trend towards ‘clean’ fund share classes has been growing.

Often labelled C, I or Z class funds, the annual management charges on these funds only covers fund management costs.

Platform administration and advice costs are then agreed and paid separately.

Good news for investors

This move towards clean share classes will hopefully result in the swift death of retail share classes. Here is why.

Whilst the total cost of retail and clean share classes are broadly similar at the moment (once you add back in the cost of platform administration and advice to the latter), the levels of transparency for the two are very different.

Retail share classes are opaque in terms of where your charges go.

That 1.5% gets chopped up and shared in different ways depending on the distribution channel (advised, non-advised or direct from the fund manager) and what commercial deals have been struck between the fund manager, adviser and platform.

In the case of direct to consumer investment platforms, rebate deals based on promotion of funds and volumes sold can result in much of the fund manager charge being rebated to the platform.

And of course the investor is often paying for the advice charge, despite not receiving any advice.

Occasionally part of the fee the investor is paying is paid back to them, as a perverse ‘loyalty bonus’ or ‘discount’.

Rather than simply charging the right fee in the first place, platforms for self-directed investors appear to take a degree of pleasure in taking fees with one hand and giving them back with another.

Transparency leads to competition

The rise of clean share classes is a very positive outcome for investors and the retail financial services sector.

With pricing transparency we should see greater price competition introduced to the market, which is already worth almost £100bn in terms of assets held on platforms by self-directed investors.

Ahead of the launch next week of IC Direct, our proposition for self-directed investors, we have made the decision to only offer clean funds from day one.

This decision limits us to some extent in terms of the range of funds which will initially be available, although we can still offer over 450 funds from 18 leading fund managers, with hundreds more scheduled to become available shortly.

What it does mean is we can guarantee pricing transparency for our customers who will pay the clean fund management cost and an explicit platform fee; with no rebates or loyalty bonuses to confuse matters.

We predict the death of retail share classes and their associated skulduggery within the next twelve months. Growing consumer awareness should see to that.

Photo credit: Flickr/ergates