Bundled/unbundled charging

talexuser

I'm confused over unbundled charging and where the advantage lies.

Say you have 5 funds each 20k for a total of 100k in Cofunds via Cavendish.

In the bundled you get 0.5%, £500 back a year from Cavendish from the trail commision, but it costs you 0.25% or approx £50 per fund if you want to switch.

The unbundled costs £40 a year, plus 0.29% management charge £290, total £330.

Do you need to be making 7 switches a year to make the unbundled worthwhile, or have I missed some other charges somewhere?

grey_gym_sock

yes, hopefully, cheaper fund classes will be available with unbundled, which might save hidden charges of 0.25%.

e.g.

bundled fund: AMC 1.5%, of which 0.5% goes as trail commission (which you get back), and 0.25% goes to platform commission (which you don't).

unbundled fund: AMC 0.75%

talexuser

Thanks, so with unbundled the charges are say 0.75% less, and you no longer get the trail commission rebate?

So unbundled you save say £750 on fund charges, but pay £330 for the privilege, a plus of £420 for example.

Compared to the bundled trail rebate of £500 minus any £50s you use for switches during the year.

Difficult to decide which way to go if the charges end up being in the same ballpark?

grey_gym_sock

yes, it's quite a close call on those figures.

JohnRo

My understanding is the reason for an FSA push to force unbundled charging, with the RDR, is nothing to do with cheaper or more expensive, but because it will make all the charges associated with investing crystal clear. Requiring an explicit statement of who is being paid exactly what, and so will enable you to make an informed choice when comparing funds, platforms, advice and the various and many fees often contained and "hidden" within things like headline AMC percentages.

IFAs have complied and accepted the spirit of the RDR. Whether the FSA will manage to get all the platforms, fund houses and brokers to play ball as well remains to be seen. Barclays already seem to be backsliding on the RDR principles.

talexuser

I think I see the trend now.

50 k of funds:

Bundled you get £250 back in rebates as long as you are with someone like Cavendish. But each switch on a say a 15k fund costs £38.

Unbundled your fees are say 0.75% cheaper = £375 but your charges are 0.29% 145+40=£185 with free switching, so you pay 375-185=£190 for free switching - quite probably better off bundled if you don't switch often.

200K of funds:

Bundled £1000 in rebate, a switch on each say 30k fund costs £75 each time.

Unbundled save £1500 on charges and pay 0.26%+40=£560, so you are £940 better off AND have unlimited free switches.


Naturally if you are not getting any trail commission and are bundled at the moment it is a no-brainer, but on smaller total funds you are not really better off in charges if getting good rebates, just in free switching.

talexuser

JohnRo, I can see it is a worry that the industry will find ways of side stepping the spirit of the rules in order to carry on with the same tricks as before. I was trying to get my head around what point it becomes worthwhile in explicit charges in specific cases. Hopefully when the dust settles we can make more informed decisions about whether a fund is worth the charges compared to another or the index.

dunstonh

Bundled you get £250 back in rebates as long as you are with someone like Cavendish. But each switch on a say a 15k fund costs £38.

Bundled means all costs are factored into the bottom line and that is the price you pay. You dont really know who gets what.

Unbundled means only the cost of the investment is priced into the investment. The cost of advice, distribution, provider/platform are added to it and disclosed explicitly.

You have a few hybrid options at the moment where they strip out the advice charge but leave the platform/distributor cut still priced in. So, in effect, they are only rebating some of the money.

Bundled/unbundled is not just about trail. Most fund houses are issuing clean share classes for January (or already have). These will only be available on unbundled platforms although some hybrids will offer them as well but maybe with a different charge to commission paying funds which isnt in the spirit of the platform review (as it currently stands).

JohnRo, I can see it is a worry that the industry will find ways of side stepping the spirit of the rules in order to carry on with the same tricks as before.

There are two trends that appear to be happening.
1 - the non-advice sector is trying to hold on as long as it can to commission and trying and stop the changes (platform review)
2 - small value holdings are going to be more expensive than the current model where larger holdings cross subsidise the smaller ones.

Actually, I could add a third to possibly cancel out number 2. Cross subsidy was considered a no no on the RDR not too long ago but there appears to have been a change of view on that in more recent times. There should not be discrimination between the investment types but cross subsidy will still likely exist and is no longer seen as being an objective or intention to remove. That said, All the unbundled platforms do have higher charges for smaller amounts.

Whilst the RDR has no direct impact on the non-advice market, with fund houses issuing clean share classes with no platform or adviser remuneration, the DIY platforms/providers hands are being forced. They still only form a very small part of the distribution and if the IFA product changes then they have to react. This goes for many DIY distribution channels. Many retail the IFA product but rebate in some way. With no commission on the IFA product any more, they will either have to negotiate a commission product/fund (which some will) but that will be more expensive than the IFA product or retail the IFA product with an explicit charge.

Glen_Clark

Alternatively, for a single one off charge of 0.75% to buy or sell you could invest your £100k in 30 - 40 (global) companies held directly in your own name

oldfella

in the fidelity version of Cavendish they have removed the switching charge for bundled funds, there is just a small dealing charge

talexuser

Thanks, dunstonh. I'm finding this all very confusing, but it's beginning to look as if very generally a total beyond 100K in funds and you should be looking to switch to the unbundled versions, but naturally we will see how it all pans out early next year in terms of actual charges.