In one of the Financial Services Authority’s early consultation papers (June 2009), the proposals would have put an end to all commission-based adviser remuneration.
The right thing to do
CP (Consultation Paper) 09/18 noted: “We propose to ban product providers from offering amounts of commission to secure sales from adviser firms and, in turn, to ban adviser firms from recommending products that automatically pay commission.”
All very sensible and the right thing to do.
This 2009 consultation paper has since gone through many iterations and the conclusion that fund management groups have come to is to issue funds with what they are calling clean share classes, with an unbundled fee structure giving, typically, an AMC of 0.75% or below. The difference between the traditional AMC of closer to 1.5% for equity funds includes an element of cash to rebate to the client which the principle of transparency should allow as long as it is clear who is paying how much, to whom and for what.
This aim to demonstrate complete transparency should be welcomed by investors, fund groups, the FSA, fund buyers, advisers and platforms alike – maybe not some of the execution-only businesses, but that’s for another day.
The FSA is still to publish its final rulings on rebates, but its position has ostensibly always been to ban cash rebates – there may be a stay of execution for unit rebates.
So while it has certainly answered the transparency part, is it fair? Is banning cash rebates the right thing to do?
On the surface, banning any payment by a fund house to an adviser/life company/platform would make sense as it couldn’t get any fairer and even-handed than that.
But banning cash rebates takes away what Graham Dow, head of investment groups’ strategy and insight at Standard Life, describes as a “key mechanism” in his negotiations with fund groups on price.
Competitive advantage
His argument is that if every comparative fund is priced the same, then there is little incentive for them to do anything other than offer their funds with anything below, say, 75 basis points. He says it would basically cut out any room for negotiation so rebates need to stay to allow the fund groups to be competitive which has to be in the best interests of the end investor.
Refunding the cash rebate to the client, he argues, is a “clear and tangible benefit” that a particular distribution platform can demonstrate to its users.
Distributors cannot compete on fund performance and, being honest, there is little in terms of service proposition to differentiate the vast majority of them either. This leaves price (and therefore better relative value for money) and breadth of product choice as their key bargaining tools and to take either of them away would not be to the benefit of an investor.
Let’s not forget what RDR is.
Its website says it is a “key part of the FSA’s consumer protection strategy. It is establishing a resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning.”
As long as the link between the fund house, the distributor/platform and the end investor is clear, then keeping cash rebates would still ensure that “consumers are offered a transparent and fair charging system for the advice they receive”.
