Platform News: FSA confirm ban on platform rebates

jem16

koru wrote: »

If the new clean fund classes have an AMC of 0.75% in most cases, this is equivalent to a rebate of 0.75%, which is better than anyone is offering on most funds (barring a few exceptions such as Aberdeen funds).

The 0.75% "rebate" is the 0.25% platform fee and 0.5% IFA fee which is normally inlcuded in the bundled amc.

Therefore, I am assuming that I'm going to want to switch my existing investments to the clean fund class. Am I right in thinking that there will be nothing to stop me doing this, other than the dealing charge to sell the old fund class and buy the new fund class?

Nothing to stop you as long as they are offered on the platform.

If so, then this is another factor to bear in mind in choosing which platform to be on over the next few months. This switch would cost £25 per fund at ATS, £20 per fund at iii, whereas the likes of HL, Cavendish/Funds Network currently charge nothing to buy and sell funds. However, can you rely upon this to remain the case once commission-free fund classes appear? Surely they will introduce a dealing charge, just like ATS and iii?

Current unbundled platforms either offer the clean class funds or rebate the whole 0.75%. You then have to pay the platform fee and the IFA fee ( assuming advised). There are no initial charges and fund switch charges as this is what you are paying the platform fee for.

The bundled platforms such as HL/Cavendish etc will have to have some sort of platform fee.

koru

jem16 wrote: »

Current unbundled platforms either offer the clean class funds or rebate the whole 0.75%. You then have to pay the platform fee and the IFA fee ( assuming advised). There are no initial charges and fund switch charges as this is what you are paying the platform fee for.

The bundled platforms such as HL/Cavendish etc will have to have some sort of platform fee.

I assume you are talking about unbundled platforms that are only available through IFAs. Both Interactive Investor and ATS claim to rebate all commissions, which I think would mean they are unbundled. They sell various funds that pay no commission, such as Troy and Vanguard. They both charge a platform fee and dealing fees for funds.

I guess what you are saying is that other unbundled platforms manage with just a platform fee and no dealing fee, so the likes of HL and Funds Network will not necessarily introduce dealing fees for funds. That could be a significant advantage over Interactive Investor and ATS if you have quite a few funds that you are going to want to switch to commission-free fund classes.

jem16

koru wrote: »

I assume you are talking about unbundled platforms that are only available through IFAs.

The one I was specifically referring to is an IFA platform.

I guess what you are saying is that other unbundled platforms manage with just a platform fee and no dealing fee, so the likes of HL and Funds Network will not necessarily introduce dealing fees for funds. That could be a significant advantage over Interactive Investor and ATS if you have quite a few funds that you are going to want to switch to commission-free fund classes.

I expect the platform fee will vary - some have a higher percentage fee and nothing else, some have a lower percentage fee plus an annual fee, some have an annual fee with dealing charges.

pqrdef

Timing question.

We're told that the platform review, not yet published, won't take effect until the end of 2013.

But if the old share classes with IFA trail commission can't be sold after the end of 2012, so all new investments are in the new clean share classes, which don't pay platform commission either, then platforms will need to get their new pricing structures in place by the end of 2012?

koru

pqrdef wrote: »

Timing question.

We're told that the platform review, not yet published, won't take effect until the end of 2013.

But if the old share classes with IFA trail commission can't be sold after the end of 2012, so all new investments are in the new clean share classes, which don't pay platform commission either, then platforms will need to get their new pricing structures in place by the end of 2012?

I think you are right. Fund management houses are unlikely to be willing to issue new classes of unit with platform commission but no trail commission (and presumably an AMC of 1.0%), given that this new class would only be valid for one year. Much more likely, they will switch to a completely clean class of unit from the end of 2012. So, in effect, the platform review will become effective from the end of this year.

dunstonh

But if the old share classes with IFA trail commission can't be sold after the end of 2012, so all new investments are in the new clean share classes, which don't pay platform commission either, then platforms will need to get their new pricing structures in place by the end of 2012?

Almost certainly. Whilst some funds houses are issuing no trail versions but still pay platform commission (like Inv Perp), others are not issuing no trail but offering full clean (Schroder). So, some platforms will have to move earlier than they may want to.

Most of the IFA platforms will be unbundled by year end. Some may be hybrid a bit longer (clean on IFA trail but still have platform commission). However, the few bundled ones left all say they will be unbundled before the end of the year.

A lot of the DIY ones use the same software or are just white labelled versions.

koru

Having just read the recent platform review document issued by the FSA, I see that there is a complication, in that fund managers will not necessarily have to reduce the AMC to remove the bits that they use to pay commission. If I understand correctly, they will be permitted to continue charging an AMC of 1.5% (which is the current standard AMC for an actively managed equity fund), but they will not be able to pay any of this as commission to an adviser or platform. Nor will they be permitted to give a cash rebate to the underlying customer, but they will be permitted to give a rebate in the form of extra units.

This seems horribly complicated to me, and it will mean that you can't just make a simple comparison of AMC's. Instead, you will need to work out the net AMC after taking into account the unit rebate.

dunstonh

I see that there is a complication, in that fund managers will not necessarily have to reduce the AMC to remove the bits that they use to pay commission. If I understand correctly, they will be permitted to continue charging an AMC of 1.5% (which is the current standard AMC for an actively managed equity fund), but they will not be able to pay any of this as commission to an adviser or platform.

Theoretically they could do that. However, there is no indication they are when you look at the clean classes already being issued.

Nor will they be permitted to give a cash rebate to the underlying customer, but they will be permitted to give a rebate in the form of extra units.

This is the bit that is still subject to change and consultation. Most operate a cash rebate currently. The FSA seem to prefer buying of more units.

This seems horribly complicated to me, and it will mean that you can't just make a simple comparison of AMC's. Instead, you will need to work out the net AMC after taking into account the unit rebate.

It will move from a single charge to a three pronged charge. Platform, investment, adviser/distributor. You may also see different platforms getting different charges for the same fund.

gadgetmind

dunstonh wrote: »

It will move from a single charge to a three pronged charge. Platform, investment, adviser/distributor.

As long as the total is sub 0.5% pa (absolute max!) then all is well in the world.

dunstonh

gadgetmind wrote: »

As long as the total is sub 0.5% pa (absolute max!) then all is well in the world.

I very much doubt it will be if you use platforms. You will have to go direct or hope for distributor deals