The platform announced this month it was cutting charges to a trio of funds within its £142m passive multi-asset range to pass on economies of scale to clients.
But Darius McDermott, managing director of Chelsea Financial Services, said AJ Bell was still trailing larger groups like Legal & General Investment Management and Standard Life Investments on fees.
Retail vs institutional investors
Doran told Portfolio Adviser that only some LGIM and SLI share classes undercut AJ Bell, which only have a single share class for retail and institutional investors.
The L&G Multi-Index funds and SLI MyFolio Market funds are between seven and 10 basis points cheaper than the AJ Bell Balanced portfolio, the most affordable product in its six-fund range, for investors in institutional share classes.
But retail investors pay 21 basis points more for L&G’s Multi-Index products than the AJ Bell Balanced fund, which now has an OCF of 0.40%. The funds are 11bps higher than the most expensive funds in AJ Bell’s passive range – Cautious, Moderately Cautious and Global Growth – which each have an OCF capped at 0.50%.
SLI charges retail investors 0.76% for its MyFolio Market funds, however this figure is only 0.37% for retail investors invested via third-party platform shares.
|Fund||Retail OCF||Institutional OCF|
|AJ Bell Balanced||0.40%||0.40%|
Source: L&G; Aberdeen Standard Investments; and AJ Bell
Doran said asset managers offering multiple share classes can look cheap on paper. “It’s a bit like Easyjet. The headline price looks cheap but once you add in the cost of paying for your seat and making sure you actually get your bag on the plane to go with you those fees start to add up.”
The proliferation of share classes per fund comes down to profit, according to Doran.
He said the financial services industry has a long history of answering the question ‘what sort of fees can we charge the client?’ with the stock answer ‘whatever we can get away with’.” “It feels as if there’s an element of that in the pricing of funds, of what can we get away with.”
Defining the main share class
McDermott tells Portfolio Adviser he compared AJ Bell’s range to institutional charges because those were the main pricing units listed on FE. McDermott says if he was adding a fund to a buy list for his clients, he would expect to be paying the main unit.
FE Analytics said it has an automated process to determine the primary share class of a fund that appears on its website. It gives priority to share classes which are currently active, that have currency matching the fund’s master currency, those that have a “longer history length” and favours accumulation over distribution share classes.
But it also prioritises higher charging retail share classes over institutional counterparts with lower charges.
“After this, the decision will be made on arbitrary but consistent criteria for picking one of the share classes, all criteria above being equal,” it added.
Rival charging structures
The L&G Multi-Index funds have eight share classes with accumulation and income share options available for retail and institutional investors, distributors and advised clients. A heavily discounted share class (L) with an OCF of just 0.06% is only available for investment by companies within the L&G group.
SLI’s MyFolio Market funds have a more streamlined list of share classes by comparison offering institutional, retail and third-party platform units.
Honor Solomon, head of retail EMEA at LGIM, said the firm’s range of share classes are designed “to meet the needs of a range of investors and client groups who are able to access our funds in a variety of different ways”. The C class units, which charge 0.24%, have very high minimum investment levels and are designed for individuals with “significant scale” that actively distribute LGIM’s funds and take on administrative and marketing duties themselves, for instance.
“We believe buying directly through us is competitively priced when taking into account the package of services that are provided when customers purchase funds through us,” she said. “Our aim is to develop a long-standing relationship with our customers, offering a focused range of products to suit different life stages and investment needs, leveraging our existing retail brand credibility and reach. Some of our funds may be cheaper on other platforms, but this will depend on the platform fees of other providers. The total cost of investing for our core index and multi-index funds will range from 0.48% to 0.71%. This is an all-in fee and will apply to existing as well as new customers.”
McDermott says fund groups generally don’t build share classes without some form of demand because they are expensive to build and expensive to maintain. “But I agree, as an observation, there are too many share classes and there are too many funds.”
Regulator to blame for array of share classes
While Fundscape editorial director Gavin Fielding also agrees there are too many share classes “and there’s no naming consistency either” he lays blame at the foot of the regulator.
“It’s not the fund groups have created too many share classes, it’s that the regulations cause the fund groups to have to do it to be able to continue to offer discounts to their best mates or favoured nation status whatever you want to call it.”
Portfolio Adviser understands there is very little new direct business into MyFolio Market’s retail share class compared with the institutional class, which is designed for large-scale buyers. The institutional share class is primarily available on Standard Life’s Wrap and Elevate platforms.
A spokesperson for Aberdeen Standard Investments said: “We believe that our charging structures are consistent with those of our competitors which are structured in a way that reflects the most popular route to investment. It makes sense that companies incentivise investors to use their preferred route to investment with the attraction of slightly lower associated fees.”
The I class for the L&G Multi-Index funds, which is universally available, is also understood to take the most flows in the intermediary market.
Simple and democratic
Doran said, as a relatively new entrant to the London-listed market, AJ Bell is concerned with launching “simple, transparent, low-cost investments for all customers”.
“Our view is that everyone should get the same price regardless of whether you’re a retail or institutional investor and whether you’re on the AJ Bell platform or not.”
But Fielding says the fact that institutional and retail investors are charged different amounts isn’t unfair.
“Institutional investors have got size and clout on their side and big mandates,” he says. “The large institutional fund groups that we’re talking about, institutional investors can put large blocks of money in at a time and it’s going to stay there for a long time. It’s much cheaper to administer that type of business than a retail business.”
Even though he admits the way retail money is run has become more institutionalised, with retail providers increasingly putting client money onto platforms, he says the giant institutional firms will always be able to use their scale to cut a better deal.
“It’s probably the same argument as someone who goes into a motor dealer,” says Fielding. A fleet buyer for Fords would go in and buy 4,000 Ford Focuses for their business and AJ Bell want to go in and buy five. Who is going to get the better deal? It’s going to be the institutional. It’s just a question of scale.”
AJ Bell “are doing it as cheaply as they can,” he continues, “but they’ll never get to where Vanguard or LGIM are until they are much, much bigger.”