Lee Robertson, chief executive of City advisory and wealth management firm Investment Quorum points out a few of the downsides in the trend towards clean share classes for investment funds.
I trust that those who are familiar with my musings know that I am always seeking to improve the lot of the end investor. I have spoken loudly and often about the byzantine charging structures often seen within the retail financial services space and how we should do more to bring transparency and price reductions to every corner. Therefore, my next statement may come as a bit of a surprise to some. I am largely against the creation of ‘super clean’ shares. At face value they may appear to offer better value for clients on some platforms with a reduction in charges. However, as with all things in retail financial services, this is not the full story.
I would preface my reasons for opposition by saying that I do not have any great objections to the larger platforms which operate on a direct to consumer basis negotiating better deals on behalf of their clients. These execution only platforms are true distributors and serve a significant and growing number of investors who have taken the time and trouble to understand what they are investing in, at what cost and do so with confidence. I wish these investors well.
For those investors who are not as informed or confident and still seek professional wealth management and are purchasing funds in conjunction with their advisers I feel that the creation of multiple share classes will lead to problems down the line with reducing choice and a potential for real concentration risk.
I have great admiration for the early and smaller platforms. They have largely built their operations on ‘sweat equity’ and have invested real time and significant energies to bringing real innovation to what was historically a pretty moribund savings market controlled largely by a few large life assurance companies which really saw little reason to change their modus operandi beyond tweaking the commission rates they paid to advisers. Capital units, loyalty bonuses, market value adjusters and things that were difficult for clients to understand ruled the day.
The early platforms changed all this and when the life companies saw just how much lazy capital – which I suspect they viewed as a life time annuity payment to themselves – was migrating via early platform adopting advisers to fund management groups from their managed funds they finally woke up. So now with the Retail Distribution Review we are seeing these same few life companies running around describing themselves as ‘distributors’ and demanding ever lower share class pricing to differentiate themselves from the smaller platforms. I would argue that few platforms are actually distributors, but merely conduits and that advisers and wealth managers are the true distributors of funds, even if we don’t much care for the term.
Registration – where we move our clients’ funds to a different platform – will become hugely difficult with different share classes. What happens if a platform which has secured preferential pricing subsequently sees lots of outflows from a particular fund or asset class? Will this lead to revised pricing midstream? How will we explain the myriad charging structures to clients, particularly if they and their associated family members are on more than one platform but possibly holding the same funds?
If these same few life companies, who arrived late to the table, are allowed to succeed, we are in danger of squeezing out the early platform innovators who did so much to bring transparency and pricing certainty to investors and who will find it difficult to compete.
There is a real danger that we may very well end up back in the situation of the same few operators being left controlling most of the savings market just because they have deep pockets.
I would hazard that the banking crisis ably demonstrates the problems with leaving just a few dominant players in a market place. Innovation decreases, pricing becomes difficult and too much power resides with too few large faceless profit engines. Treating Customers Fairly will make it difficult for advisers to ignore the super clean operators so we could find ourselves unwillingly having to support larger brands we don’t much care for just to satisfy regulatory convention and thereby hasten the demise of the platforms we actually do like.
Finally, with the recent badly disguised asset and trail commission grabs by some of these life company platform operators under the guise of ‘legacy systems’ without passing the savings on to their policyholders, I think we can see that they are happy to push on with building their own income at the expense of both supporting advisers and clients.
I truly hope the fund management groups stick to their current line of holding out against multiple share classes. They appear to appreciate the potential problems and that it is not all about cost as there is also a value dimension to be considered. I guess only time will tell.