FCA changes could fail to budge pre-RDR investors

Financial Conduct Authority (FCA) changes that allow asset managers to more easily switch investors between share classes could still see a minority of investors refusing to budge.

FCA changes could fail to budge pre-RDR investors


Since final changes on the asset management market study came into effect on April, asset managers have not needed individual consent to switch investors into alternative share classes. The share class conversion must be in the client’s best interests and notification must be provided at least 60 days ahead of the move.

However, Baillie Gifford says a minority of investors refuse to leave expensive pre-RDR share classes for cheaper alternatives, despite extensive client communications.

“Thirty investors, who for best reasons known to themselves, have remained in the legacy share class,” a spokesperson told Portfolio Adviser.

Baillie Gifford investors would benefit on average from a 55% discount on ongoing charges figures (OCFs) by investing into their clean classes when compared to the corresponding pre-RDR Retail share class, according to research published by Fitz Partners in May.

Baillie Gifford says it no longer sells the expensive A class shares, which have an OCF of 1.54%.

Fitz Partners chief executive Hugues Gillibert thought Baillie Gifford’s 30 pre-RDR share class investors was a relatively low number.

“We have a lot of clients who are very frustrated about trying to move retail investors out of legacy share classes,” Gillibert says.

Investor rationale

Lang Cat consultant Mike Barrett says there could be legitimate reasons behind investors remaining in pre-RDR share classes.

“Depending on how those investments are structured and what wrappers they are in then there might be some sort of tax consequences, or there might be trail commission from the old share class that is funding advice.

“If they transferred to the clean share class, that gets ended. The client would either be without ongoing advice or would have to agree a fee with their adviser.”

The FCA said fund houses could reduce fees on expensive pre-RDR share classes where trail commission is no longer paid.

Depositaries’ obligations to ensure a proposed conversion meets the prospectus terms are already covered by existing rules.

Largest discounts

Old Mutual Global Investors, Legal & General, Franklin Templeton and BNY Mellon investors face the largest discounts on OCFs for clean share classes, after Baillie Gifford, according to the Fitz Partners research.

Gilbert said asset managers with the largest discounts had been substantially lowering management fees and keeping other expenses such as administration low.

Average discount in clean share class OCFs

Fund promoter Clean OCF average Legacy OCF average Discount
Baillie Gifford 0.69% 1.54% 55.04%
Old Mutual Global Investors 0.81% 1.72% 53.06%
Legal & General Investment Management 0.83% 1.71% 52.69%
Franklin Templeton Investments 0.80% 1.65% 51.62%
BNY Mellon Investment Management 0.83% 1.65% 49.61%
Source: Fitz Partners

Franklin Templeton said it is continuing to review whether clients are in the appropriate share class in light of the FCA market study.

BNY Mellon told Portfolio Adviser it has invited investors in pre-RDR share classes to convert via its non-advised online service Investorzone. It declined to provide further information on the effect of FCA rule changes on this process.

OMGI and Legal & General declined to comment.

Clean share classes offer a 44% discount for the average UK investor, Fitz Partners says.

But Gillibert said most of the extra charges in pre-RDR share classes go to distributors. “It doesn’t make much difference to asset managers whether these people are in the legacy share class or not.”

Platform charges

Several people Portfolio Adviser spoke to questioned whether the Fitz Partners’ research accurately reflected the potential discount on clean share classes, noting it did not include a platform charge.

Quite often these share classes were purchased before the advent of fund supermarkets,” Barrett says.

“People would have been buying direct because they read an advert in the Daily Telegraph in the late 1990s and clipped out a coupon and sent it direct to the asset manager. It was long before Hargreaves Lansdown let you just buy things online.”

Gillibert said the purpose of the research was to highlight how much asset managers have lowered their fees, rather than the true end cost to investors.

He stated platform costs would have added a layer of complexity to the analysis because they differ widely depending on the platform and the amount invested.

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