Consumer Panel says FSA should ban all platform rebates

dunstonh

I know a number of the regulars are following the debate on fund rebates and how their platform may be impacted. The FSCP has just issued its report to the FSA saying that they should be banned.

http://www.citywire.co.uk/new-model-adviser/consumer-panel-says-fsa-should-ban-all-platform-rebates/a478475?ref=new-model-adviser-latest-news-list


Whilst the platforms have their vested interests (with the unbundled platforms like Transact in favour of banning the and bundled platforms like Cofunds or HL being in favour of not banning it) the FSCP does have sway with the FSA as it has no such bias and is the independent statutory body in place to represent consumers.

Reaper

Hmmm. If their measures to protect me result in me paying more I'll be less than impressed. However if the separate fees they talk about are negotiable (eg much less if I go direct to the platform instead of via an intermediary) then I wouldn't mind.

dunstonh

Reaper wrote: »

Hmmm. If their measures to protect me result in me paying more I'll be less than impressed. However if the separate fees they talk about are negotiable (eg much less if I go direct to the platform instead of via an intermediary) then I wouldn't mind.

Unbundled is certainly more transparent but you would see charges increase on investments that do not pay commission and charges come down on investments that do.

If you get the full rebate instead of platform keeping it but have to pay the platform £200 a year then there would be a breakeven point. It would see smaller investors pushed off platforms and back to fund houses (or pay more for it) and larger investors being better off.

Rollinghome

The central reason for the RDR was the longstanding problem of “commission bias” when advice is sold and very much needed to happen. Small investors turn into big investors so savvy firms won’t want to lose them with unrealistic pricing. There will always be a degree of cross-subsidy for good commercial reasons.

At the same time there needs to be half an eye on the very dominant position of H-L which, at some point won’t be in anyone’s interests.

The reason for their dominance is that they give very good service and I often recommend them. The downside is their often very misleading marketing. Investment trusts can’t be advertised (though the wrappers can) and advertising for unit trusts is closely regulated but H-L seem to have a much freer hand.

They’re now using their client base of largely unsophisticated investors who mostly buy unit trusts to sell them other investments they may not fully understand.

When they sold a corporate bond issued by the door to door finance company Provident Financial recently, I saw posts from buyers who were confused about the difference between corporate bonds, corporate bond funds, and savings. When they sold an IT (one that their Nigel Dampier had previously slated for not being a UT before Fidelity agreed to pay them trail commission) a lot of posters weren’t too clear what an IT was and why the charges for the one offered by H-L were very unusual. The corporate bond sold by H-L was also unusual in paying them trail commission. The article this month in the magazine they send to clients about why they should sell with-profit bonds to buy unit trusts I’d have agreed with if the figures they used hadn’t been potentially misleading.

So I see mostly advantages in ending a system where small investors have been paying a high level of commission for advice that might be influenced by the commission system itself. Commission and unbiased advice don’t go well together. But I’d be worried if H-L were too dominant in the market and especially if the way they sell isn’t better controlled. In particular, there needs to be a clearer division between what’s just advertising and what isn’t. Too often H-L’s advertising can only be seen as actually being advice within any normal meaning of the word.

It’s going to be a fine balancing act.

dunstonh

No new information but this just appeared on citywire:

http://www.citywire.co.uk/new-model-adviser/conundrum-on-cash-rebates-forces-fsa-to-delay-platform-paper/a482345?re=13590&ea=196312&utm_source=BulkEmail_NMA_Daily_PM&utm_medium=BulkEmail_NMA_Daily_PM&utm_campaign=BulkEmail_NMA_Daily_PM

Looks like the consumer panel has managed to persuade some at the FSA.

Loughton_Monkey

So my first reaction is will we see every fund manager reducing charges by the full 0.5% they are currently paying out (in most cases?). Given that they don't always pay this, I can see them reducing by less than this. Then I wonder what the FSA does about existing arrangements. A large pension fund with trail being paid to an IFA - can he keep it?

If platform providers are allowed to overlay their own 'fees' based upon a percentage of fund value, then surely very little changes. Flat fees, on the other hand, will favour the larger investor and screw the smaller.

As a customer, I find it intriguing to speculate about going to an IFA saying I have an existing pension fund of £100K. Please find me a low cost fund provider and recommend a range of 10 funds that meet my risk profile of ..... What is your fee? And then, after a cough, say that's fine. But actually the fund is worth £500K.

utigers

If the way we are charged for buying funds etc... is changing how about introducing a performance related fee instead?

Might put an end to sloppy 'Independant' advice and companies pushing out funds for their own short tern interests.

dunstonh

So my first reaction is will we see every fund manager reducing charges by the full 0.5% they are currently paying out (in most cases?). Given that they don't always pay this, I can see them reducing by less than this. Then I wonder what the FSA does about existing arrangements. A large pension fund with trail being paid to an IFA - can he keep it?

Pre RDR cases continue on old charging terms. Its new business/purchases/switches after RDR that get revised terms. Only at fund level though. Not at contract level.

As a customer, I find it intriguing to speculate about going to an IFA saying I have an existing pension fund of £100K. Please find me a low cost fund provider and recommend a range of 10 funds that meet my risk profile of ..... What is your fee? And then, after a cough, say that's fine. But actually the fund is worth £500K.

Not a lot different to now really. You either choose to have one off transactional advice and pay for it on that basis or your have servicing advice and pay for it on that basis. Only difference is that with say £50k, you may be told that servicing advice is not cost effective whereas with 500k it can be very cost effective.

If the way we are charged for buying funds etc... is changing how about introducing a performance related fee instead?

How do you measure performance? Relative to sector? relative to what? Over what period do you measure it and at what point do you pay it?

utigers

Its an idea that needs to be incorporated within fees for funds, and those that push or encourage consumers towards those funds can benefit from also, if they perfom well of course.

A lot of consumers have little experience in funds and rely on others for their selection. A performance fee would give customers some confidence that chosen funds were genuinely in the best interests.

There are too many poor/underperforming funds out there collecting commisions that dont warrant it. Paying bonus' for underachieving or loss making, makes a lot of us mad.

Thats the theory........

How it would work? Obviously difficult, and there are plenty out there with better knowledge than me to know whether it is possible.

The annual management charge could be set really low (%) and dependant on the quartile position in its sector at the end of the year this is increased???

dunstonh

The annual management charge could be set really low (%) and dependant on the quartile position in its sector at the end of the year this is increased???

So, on the basis that there are more good years than bad, this would increase the charges. Also, what do you set it relative to? All you would do is encourage greater risk taking which is one of the causes of the credit crunch/recession.

There are too many poor/underperforming funds out there collecting commisions that dont warrant it. Paying bonus' for underachieving or loss making, makes a lot of us mad.

By removing commission on funds you effectively removes any perception of bias. Although it has become rather standardised in recent years with 0.5% being the popular norm.

Loughton_Monkey

dunstonh wrote: »

How do you measure performance? Relative to sector? relative to what? Over what period do you measure it and at what point do you pay it?

To me, this is one of the biggest 'issues'. I always end up saying to myself that you can't measure performance. To some extent, this is why I am suspicious of fund recommendations - by IFA's and by anyone else for that matter.

To the uninitiated with money, an IFA is almost an 'essential'. Most IFA's (I hope) would get full marks for analysing full financial situation of client. Appreciating his priorities. Looking at lifestyle, aspirations, and affordability.... Ending up with a firm recommendation on X into 'this' pension, spouse to put Y into 'that' pension. Amount of Z to go into ISA... change this into spouse's name for tax reasons....

The value is in the 'shape' of the solution. In the 'products' recommended. In the specific education on risk/rewards and what the 'solution' is designed to achieve.

That's worth money. Especially if you are a scientist, or a teacher, or someone who's knowledge and skills are in something other than finance.

But after that, everyone's on a hiding to nothing. My IFA has put me in Aberdeen Property and JPM Japan. What happens if after 5 years, I find myself 30% below what would have happened if I had gone JPM Property and Aberdeen Japan?

On the one hand, as client, I would be highly miffed. But how could IFA be blamed, especially if Property and Japan had both been high performing sectors? Or what if Japan had actually bombed, while the rest of Asia went through the roof? Why didn't my IFA foresee that? All very difficult!