Tell, me, does the advent of super clean fund share prices mean that so-called clean prices are, in fact, slightly soiled?
It is a serious question. If a fund is available at an annual management charge of 60bps, why would I pay 75bps? What am I getting for paying 25 per cent more? If the same 25 per cent were the difference between two platform charges, it would be a no-brainer.
In response to this question, some advisers have rightly said that only some funds give discounts, thus the differential across the portfolio is marginal. They are quite correct, at least for now. However, the game is ever-changing and Old Mutual has introduced a range of funds with an average AMC of 52bps.
The list of fund managers who have signed up is not too scruffy, including Aberdeen, Artemis, BlackRock, Fidelity, Henderson, Invesco Perpetual, JP Morgan, Newton, Schroders and Threadneedle.
Life, though, is never simple. The Old Mutual Artemis Income Fund is not the Artemis Income Fund, it just looks like it, a similar tactic to the mirror funds used in life products. Will they perform as well? There is no reason why not, especially with the advantage of a lower charge. Old Mutual has laid down a real and fascinating challenge to advisers.
So, where did it all begin? In the old days, before RDR 2 that is, fund managers paid the big platforms who operated bundled charging 25bps out of the AMC, ostensibly for administration. In addition, they paid rebates that were not from the AMC, which rewarded volume. A typical rebate might have been 7bps. This made an important contribution to margins.
All rebates, of course, were banned at the end of March this year.
That might have been the end of it, except that the big platforms that had offered bundled charging did not want to lose their edge, as generally their operating costs are larger than the smaller wrap platforms – and this is where the battle began.
They asked fund managers for better terms, to match the rebates they had lost. They could not benefit themselves, but hoped by offering better terms to their customers, they would benefit from increased volume.
Since nothing is simple, there are two ways of offering a discount:
- A lower AMC, for example, 60bps as opposed to 75bps.
- By offering a unit rebate (still amazingly allowed under the RDR), which could be converted back to cash in the customers’ platform cash account.
Both solutions have problems. Lower AMCs mean more share classes, the so-called super clean. This creates cost for fund managers and problems in providing historic and future data. It also increases complexity for both advisers and their clients. There are also problems when a customer moves from a platform that enjoys a special price to one that does not.
The unit rebate solution suffers from the little problem of being taxed in the customers’ hands unless within a tax wrapper such as Isa or Sipp.
