A year on since the UK overhauled its retail fund distribution market, Martin Morris looks at how platforms and other players have digested changes, and finds there is still some scepticism about the removal of fund selection bias.
If the principal aim of the UK’s Retail Distribution Review (RDR) was to bolster consumer confidence in the financial adviser industry, then opinions vary about the more specific impact RDR has had on the fund platform landscape.
Fund platforms, which serve independent financial advisers (IFAs) by offering them a link to a wide variety of funds, have also had to absorb the RDR changes.
Freddie Findlater, head of adviser platforms at The Platforum, an industry group, notes the Financial Conduct Authority (FCA) has made it clear, through an April 2013 policy statement on charging, that fund managers and other investment houses cannot use financial incentives to influence distribution on platforms.
On the face of it, the new reality since the RDR was implemented 12 months ago shall be a world of unbundled pricing and no trail commissions. All fund charges should appear itemised so customers can see what they’re paying for and who to.
The removal of trail commissions is the key to removing fund selection bias among IFAs. Findlater says: “From a financial adviser’s perspective, the phasing out of commission payments from product providers to advisers [replaced by explicit fees paid to advisers by clients] has ensured that advisers are not tied to product providers in any way.”
BIAS REMAINS A RISK
David Ferguson, chief executive of Nucleus Financial Group, a fund platform, says there is still a risk of bias.
“Fund bias has been diluted but remains a risk as some platforms continue to believe they can influence distribution in return for favourable terms. For advised platforms we have seen more talk than action and it remains to be seen if anyone can deliver anything credible in this space.”
He further claims that while transparency is beginning to deliver clarity and value for money, the ongoing tendency for some platforms to favour and promote bias towards some fund groups is hindering progress.
The Platforum, in a report, agrees, arguing that even transparency is no guarantor of clarity. In fact, confusion about pricing could become a reality in the direct platform channel.
“Even with clean share classes, advisers still struggle to conduct a like-for-like cost comparison of platforms. Indeed there are more than 60 different ways in which a platform can charge a fee,” the October 2013 report – The RDR – So How Was It for You – Baby? – says.
CLEAN SHARE CLASSES
With commission-paying funds no longer available after April 2014, clean share classes are replacing the old commission-paying ones. The net effect of this change, in theory, is to reduce a fund’s annual management charge from 1.5% historically to about 1% now. That original 1.5% typically included commission to the adviser of up to 0.5%.
Aubrey Nestor, head of product-transfer agency, at software provider Bravura Solutions, says most clients have created clean share classes for most of their existing funds but that the original “full load” share classes are still there to support legacy business, and this will inevitably cause a day-to-day increase in a transfer agent’s (TA) activity, which includes pricing, distribution processing and reconciliations for different share classes.
This additional cost will need to be borne by the TA until such time as the legacy business, and associated share classes, can be wound down.
In its guidance paper issued mid-January 2014 the FCA stated that payments from product providers to advisory firms should be based on reasonable reimbursement for the costs incurred by advisory firms and that any such payments should always enhance the quality of service provided to customers.
By ending commission payments from investment product providers to advisory firms, it added that it wants to help ensure providers compete on the price and quality of their products to secure distribution rather than on commission levels.
In addition, advisory firms should not be inappropriately influenced by the payment of commission when providing advice to their customers.
Yet the guidance followed a review that found payments were still being made that could result in advisory firms favouring one product provider over another, undermining the aims of the RDR.
In its report, The Platforum noted that while customers will have a clearer idea than before about what they are paying an adviser, until there is a clearer regulatory environment in which firms can build solutions for customers like those who are in need of guidance but are unwilling to pay for advice, the current market arguably has fewer consumers who can have their needs addressed.
Against this backdrop, jockeying for position within the industry has continued. Hargreaves Lansdown, whose IFA business in part services clients using its Vantage platform, recently unveiled its RDR charging structure. Starting at 0.45% for the first £250,000 (€303,000) invested, the price then drops to 0.25% on the first £1 million, 0.1% up to £2 million, and no charge thereafter.
The company claims the average fund annual mangement charge for a client investing in one of its “Wealth 150” list of actively managed funds — set to be 0.65% from March 1st 2014 – compares favourably to the estimated 0.76% for the same funds from other retail brokers.
Industry criticism has been swift though. Nick Hungerford, chief executive of Nutmeg, a low-cost investment manager, argues that while the RDR is finally forcing wealth management businesses to come clean about their charges, there is still some way to go on the transparency front when it comes to service, fees (including even the most embedded of fees such as transaction spreads and FX charges) and net performance.
In the case of Hargeaves it has “… missed a golden opportunity to simplify charges for customers. Looking at the new Vantage tariff we see no fewer than 73 lines relating to different charges,”
But as Danny Cox, head of financial planning at Hargreaves Lansdown, has noted: “Overall, we have had a positive response from clients and, as we have always done, we listen carefully to their feedback and views. We have had far fewer calls to our helpdesks about the new Vantage pricing than we had expected.”
NEXT STOP, EUROPE
Longer term, the RDR is likely to serve as a template for Europe and further afield where regulators are already examining its impact in the UK.
As David Moffat, group chief executive at IFDS, a transfer agent provider, says that in Switzerland and Holland, for example, regulatory actions have been taken against undisclosed retrocession payments – that is, payments made from client money but often not disclosed to clients – to discretionary managers and private banks.
Moffat anticipates the move to clean share classes now underway in the UK to progressively become the accepted norm across the Continent.
“The interesting point is to see whether such an initiative will affect those European-domiciled funds distributing cross-border into the Asian region, potentially making the ‘clean’ structure the global norm,” he says.
Watch this space.
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