Alliance Trust Savings switch to clean fund classes

koru

I was previously scathing about ATS when it introduced quarterly fees for investment dealing accounts and doubled the fees for ISA's. So, credit where credit is due, I am very impressed with how they are handling the transition to the post-rebate environment.

I received a letter from them today which notified that early in 2013 they will be voluntarily switching existing fund investments into the new rebate-free fund classes (except in cases where the new AMC would be higher than the old AMC, net of the rebate). In many cases, their rebate on active equity funds is 0.5%, so with a typical old AMC of 1.5%, the net AMC currently being paid is 1.0%. Generally speaking, if a new fund class is completely rebate free, it will have an AMC of 0.75%, so ATS investors are going to be better off.

I was rather expecting that platforms like ATS would leave existing fund investments on the old fund classes and leave it to the investor to switch to the new fund class, which would mean a charge of £12.50 to sell the old class and another charge of £12.50 to buy the new fund class (total £25 per fund switched). Of course, ATS has always said that it rebates all commissions that it receives, so making these switches does not mean it is missing out on any chance to keep earning commission. Perhaps ATS is not doing this for the benefit of its customers; perhaps it just want to get rid of the hassle of dealing with rebates?

It will be interesting to see what other platforms do, particularly those who do not currently rebate all commission, such as Hargreaves Lansdown and Best invest. As I understand it, platforms which have not provided advice to the investor are permitted to continue selling commission-paying fund classes until the end of 2013, so I am guessing the likes of HL will continue doing so until the end of December next year. And it is also my understanding that intermediaries can continue to receive commission on existing holdings indefinitely, so my guess would be that HL will just sit on existing commission-paying holdings and rely on many of their customers to be too lazy or ill informed to switch their existing holdings to the new rebate-free fund classes.

SnowMan

A very interesting move.

From a tracker perspective I am assuming this means the HSBC tracker range clean C class of units will be available through ATS shortly.

With the £48 platform fee then clearly currently it still works out cheaper to hold the 0.25% amc dirty class without platform fee via the HSBC Global Investment Centre or Fidelity Fundsnetwork for example for those with less than £48,000 to invest (as OCF is lower on the clean class by 0.1% and 48000 x 0.001 = 48), than holding the clean class when available through ATS.

The dealing fees and transfer fees and all the other fees are the things that put me off using ATS. It is good to hear these will at least be avoided by those with current investments with ATS during the switch.

At the moment the HSBC Global investment Centre and Fidelity fundsnetwork look the safest place to hold HSBC trackers, albeit the 0.25% amc versions (as there is no extra platform fee) and would be relatively easy to exit from there when all the post RDR propositions become clearer.


I think ATS are in quite a good position to deal with RDR following this move. The fact they have their own platform must help as it means just 2 charges (fund charges and platform charges).

With brokers using separate platforms, for example Cavendish who use Fidelity Fundsnetwork) there are 3 separate charges (fund charges, broker charges and platform fees). While the total service is the same,with 3 separate entities wanting their slice of the cake it is hard to see how that will work out cheapest post RDR.

koru

They don't currently have the C class HSBC trackers, but you are right that there would appear to be no reason why they would not introduce this class. Then again, although the old HSBC trackers do pay a small amount of platform commission to some platforms (such as Hargreaves Lansdown), they don't seem to pay any commission to ATS (judging by the lack of rebate on these funds from ATS), so ATS don't necessarily have any major incentive to switch to the new C class. That is, unless they think they could earn new customers (and therefore new quarterly fees) by offering the new C class.

koru

koru wrote: »

They don't currently have the C class HSBC trackers...

They do now: http://www.alliancetrustsavings.co.uk/rdr-updates/

koru

They still haven't switched my funds to clean classes. The recent announcement about commission rebates being taxable in the hands of the investor will have made it more tricky for them to decide which funds should be switched. They have said that they will not switch in cases where the dirty class is cheaper, net of the refund, but I wonder if they will now take into account the tax on the refund (for investments outside of tax wrappers)? Trouble is, unless they know what rate of tax you pay, they can't really judge whether clean class is cheaper.

SnowMan

Various press articles today are saying that ATS will convert all dirty funds to clean funds by the end of the year for example

http://www.ftadviser.com/2013/04/24/investments/wraps-and-platforms/alliance-trust-savings-to-scrap-legacy-trail-by-end-of-year-aHtcgfmPPf6o5vIzA1HwNK/article.html

http://www.moneymarketing.co.uk/wrap-and-technology/ats-to-convert-all-legacy-business-to-clean-funds-by-year-end/1070025.article

koru

@SnowMan, thanks, that's interesting, although a more honest report would have said that they had already announced this intention back in December and they are still working on it. In fact, they said they would do the switches early in 2013, which is not very specific, but I would say that it is no longer early in 2013, so a more honest report would be that they are pushing back the timing of the switches, but they still intend to do it during 2013.

Those two reports don't really mention what ATS will do in cases where the dirty class has a bigger rebate than the AMC saving that is available with the clean class. An example would be Aberdeen Emerging Markets, the dirty class of which has an AMC of 1.75%, with a rebate of 0.88, giving an effective AMC of 0.87 (at least if the fund is held within a tax wrapper), compared with a clean AMC of 1.0%. The cynic in me wonders if holders of funds like this will suddenly receive emails from ATS saying that very unfortunately Aberdeen has reduced the rebate on these classes, so the clean class would now be a better deal.

koru

I have now had confirmation from ATS that they have pushed back the timing of these conversions to the autumn and in cases where they are not able to negotiate a clean class version of a fund currently held by an ATS customer, they will offer conversion to a similar fund that is available as a clean version. In deciding whether a customer would be better off staying with the dirty version, they will not take into account tax on the rebate.

Therefore, ATS customers might prefer to review their existing ATS portfolio and make their own decisions about whether they would like to switch to clean classes. If you don't want to wait until the autumn or you have a fund which you would be better off converting because of the tax on the rebate, you might need to sell the old dirty class and purchase the new clean class yourself. Unfortunately, this will involve dealing fees and will potentially trigger a capital gain, so you might prefer to wait for ATS to do the conversion for free and under the CGT exempt method.

It took a while to get a proper answer, but I think the above is a fair summary. For those who are interested, here is my full discussion with them:

Dear ATS

At the beginning of December 2012 you wrote to me to say that early in 2013 you would be switching existing fund investments into clean classes. As it is now May and this has not happened, can you let me know when this will be happening? In view of the fact that rebates are now taxable, I would be significantly better off with the clean classes, so I am anxious to know when you will be switching me.

You said that there would not be a mandatory switch in cases where the AMC of the existing investment, net of rebate, is lower than the clean class AMC. Will you take into account tax on the rebate in making this decision, for investments outside tax wrappers? If yes, will you be confirming the tax rate of each client or will you simply assume a standard tax rate? If the latter, what tax rate will you assume?

One of my existing investments is Standard Life Global Absolute Return Strategies, on which I currently receive a rebate of 0.75%, which is equivalent to 0.45% after tax. I see that you do not currently have a clean equivalent. Do you anticipate being able to add this shortly, and if so how long is this likely to be?

Dear koru

I can confirm that where a Clean alternative is available for a fund we will add this on to your portfolio with the insight to have this converted by the end of the year. The conversion of the Funds lies solely with the Fund Managers and when we receive this instruction this will be forwarded to clients to make you aware that this is taking place.

We are also constantly in contact with the Fund Managers with regards to adding Clean Priced funds on our platform and Standard Life is one of those, so there may be an alternative to your holding at some point.

Any rebate on these funds we believe will be taxed at source and the cash balance that you receive in your account will be after this has been applied.

You are able to switch at any time into another fund if you wish, since this is a self-managed plan you have the option to sell and purchase at any time.

Dear ATS

Many thanks for this.

So, my funds might be converted any time over the next eight months, but you cannot be specific?

You did not answer my question about how you will decide whether an investor would be better off keeping their existing unclean classes. Is this because you will now be automatically converting in any case where there is a clean version of the fund, even in cases where the AMC of the clean version is higher than the AMC of the unclean version, net of the rebate? (I realise that unclean classes will not be allowed from 2016, but this is three years off.) Your original letter said that you would only convert in cases where the investor would be no worse off, so, assuming this is still your policy, for the purpose of deciding if investors will be worse off will you take into account tax on the rebate and if so at what rate?

Dear koru

Thank you for your email.

The conversion to the clean funds is solely at the Fund Managers discretion therefore we do have to wait for their confirmation before we can complete this action, however you will be notified of this information.

The tax rebates are still paid on the old funds on the platform and this will continue to happen until the funds are converted, however since April the rebates are now taxed before they are applied to your account.

In most cases the clean priced funds that we have added onto our platform do have better or the same terms after the rebate had been paid, we do still stand by the statement that we made in the original letter. The changes that have happened since the introduction of RDR like the tax on rebates was something that was decided by the Government, however we tried to pay all rebates that were outstanding before this was actually applied so that you got the full rebate.

Dear ATS

Thank you for your reply, but I am still not clear about the answer to my question about the criteria for conversion. I don't want to make a big fuss. I just want to be able to anticipate with some certainty whether or not you will be converting all of my funds to clean class or not, so that I can make some sensible decisions.

It seems to me that there are three alternative possibilities about what you plan to do:

1 Convert all existing holdings to clean versions, where these exist. So, the only holdings that will not be converted are those where you have no clean version.

2 For all funds where you have a clean version available, you will only convert in cases where the clean AMC is lower than the dirty AMC minus any gross rebate. This will mean that you will generally convert, but there will be cases where you do not convert, because the clean AMC is higher.

3 The same as 2, except that (for funds that are not held within a tax wrapper) in working out whether the customer would be better off staying with the dirty class you will take into account the tax on the rebate. Except for investors who are below the basic rate tax threshold, the tax on the rebate will mean that the effective rebate is lower and so there may be some cases where an investor might be better off staying with the dirty class of a certain fund if it is held within a tax wrapper, but would be better off switching to the clean class if the fund is held outside of the tax wrapper.

An example is Aberdeen Asia-Pacific, where the gross rebate means that the effective AMC is 0.87% within a tax wrapper, which is lower than the 1.0% AMC for the clean class, but the effective AMC would be higher than 1.0% if the rebate is taxable. So, if your policy is 1, you would convert. If it is 2, you would not. And if it is 3, it would depend whether the fund is held within a tax wrapper.

So, may I please have a clear answer about whether your policy is 1, 2 or 3?

And if the answer is 3, please clarify whether you will be checking what rate of tax each individual customer pays, or will you simply assume the same rate of tax for everyone? If the latter, what rate of tax will you assume?

As I say, I'm not trying to make a fuss. I can see that this is a difficult decision for you and you might not be able to please everyone. However, you do nevertheless have to make a decision and I don't think it is unreasonable for me to want to know what it is. Your letter in December clearly said that you planned to do number 2, but I can see that the change in the tax on rebates has complicated things, which might mean that you have switched to 3, or you might have decided that this would be too complicated, so you will stick with 2. Or, perhaps you have decided that even 2 is too complicated and you will simply do 1. I just want to know.

Dear koru

I have had an opportunity to review your case and apologies for any confusion.

Firstly I should begin by saying that we are doing everything in our power to ensure that this transitional period into clean priced funds are as quick and smooth as possible - even though it may not appear that way from your experience. We made the decision as a business towards the end of 2012 that we would wholeheartedly embrace clean priced funds as we believe that they were absolutely the best thing for clients - a clearer transparency of pricing, and in most cases a lower annual management charge. This move has meant that we are effectively ahead of the curve which has benefits and drawbacks. The obvious benefit is that we have one of the largest clean priced offerings among our peer group, but a downside is that we are still having to negotiate with the fund mangers regarding a number of points including timetable for conversions.

At present we are formulating a strategy on how best to process these conversions as they become available however it is my understanding this will likely be in quarter three of 2013. Furthermore there may be some instances where new terms cannot be reached with the fund managers in which case we will likely facilitate a free switch on the basis of one into one. The switches will be carried out after the conversions so are expected later in the year.

To put it simply, we will follow option 2 from your previous email as we look to move as quickly and fully as possible into clean priced funds.