As rebates have become a dirty word, members of the platform and fund distribution sectors have been busying themselves with price cuts, new, clean, special, bespoke, super clean and squeaky clean share class launches.
Such proliferation and the administrative burden created has always been an unintended consequence of the RDR that none of us were looking forward to.
None of us, it seems, except for clients of Hargreaves Lansdown. Or rather, potential future clients of Hargreaves Lansdown willing to put their money into the latest favoured fund list.
The distribution powerhouse, responsible for administering more than £40bn of direct investors’ money, was always the one to watch when it came to discounted fund charges.
Price first, performance second?
It often gets a kicking (as do other distributors that put together core 'buy' or recommended lists) that these are presented as 'best' funds in a given sector based on quality alone.
But platforms were once called fund supermarkets for a reason and the same rules apply. Kellogg's, Heinz and Nescafe negotiate better terms with Tesco than they do the independent corner shop, which will buy its goods from a wholesaler, and both situations priced accordingly.
So of course price is of course a factor, and more now than ever. And if investors don't realise that, then one could argue they shouldn't be investing in the first place, but it should be disclosed very obviously, just in case.
Hargreaves issued fund management groups with a tender document last summer when it was preparing for its post-RDR distribution and pricing model, which stipulated that groups put forward their case to be included in its list of favoured funds, the Wealth 150.
Inclusion in this list, and others like it, bring benefits of more marketing support, better 'shelf space', research and information to investors.
The latest core list, the Wealth 150+, takes this to a new level.
Exceptional support
Described in said tender document as a subset of the Wealth 150 “warranting exceptional support”it said: “Our considerable and rapidly expanding distribution efforts will be used to extensively present these funds to clients well above the support we will give to the Wealth 150.”
While the core list has been designed of give investors the most performance potential at the most competitive price, there are some interesting choices, suggesting some groups are more willing or able to negotiate.
Jupiter for example, was just too expensive, according to Mark Dampier, head of research at HL.
He claims to have locked horns with outgoing CEO Edward Bonham Carter in the past over performance fees and said he was amazed at some fund management group's lack of cooperation in relinquishing basis points.
BlackRock, Investec, Henderson and J O Hambro are some of the other high-profile groups which didn't make the cut.
As the price war heats up, with other high volume fund buyers applying pressure to groups and asking for the same terms, one does question how many share classes will result, if a banded approach starts to be taken.
If HL can guarantee £100m of inflows during a fund's launch period, then no wonder it will encourage upstarts onto the list.
The larger, more established household names, with a few exceptions are absent from the list, which may be unfair for those looking to dip their investment toes into more established waters.
Others have suggested that the heavily discounted funds that will receive “exceptional” support will be heavily promoted towards attracting new clients to HL, on the basis that they can shout about their 'best for cheapest' position.
Some critics of HL have argued that as their rebate-driven business model became obsolete with the RDR, a new approach had to be taken and new clients were the solution.
Dampier struck me as almost disappointed by the competition, expecting a lot more pressure from his peers, adding he sometimes feels like HL is marketing and negotiating on behalf of the entire industry.
How much margin is left?
In terms the of list itself, on his blog FundExpert, Brian Dennehy has raised questions over the glaring omissions at group and sector level (no property, high yield, specialist or global bond funds), and the unnecessary doubling up in others (Japan).
Multiple Artemis and Newton funds appeared and the inclusion of Royal London Sterling Extra Yield Bond fund at the biggest discount and the Morgan Stanley Sterling Corporate Bond fund seemed to surprise many a commentator.
Royal London said if other distributors wanted to access its Y share class, with a minimum investment of £150m and AMC of 32bps, and demonstrated similar scale to Hargreaves Lansdown it would welcome discussions.
RLAM's wholesale share class has a £100,000 minimum investment, an AMC of 75bps and an ongoing charge figure of 85bps. Its institutional one has a 50bps AMC and a £10m minimum investment.
Dennehy says in stripping back its promotional messaging even further, HL might have managed to cut through with a clear message for its customer base.
“Consumers and advisers have a hunger for a clear message. Yet it is less stressful to believe a simple but flawed message, than a more complex but correct message. There is a tendency to believe most rating systems or expert views, though there is little or no understanding of what lies behind them – and despite the fact that no evidence is presented which shows these ratings or views provide a significant edge in terms of future performance, nor that the methodology is repeatable,” he says.
He adds that for funds to be considered 'rated' they must adhere to two criteria: a clear, understandable, and repeatable process; and solid evidence, over a long period, illustrating how these ratings add value.”
Which, if that was taken into consideration for the Wealth 150+, it has not necessarily been communicated.
He says that only 21 of the 27 core funds have sufficient track record, feels that the exclusion of any US or China vehicles is “bizarre” and only one mixed investment fund – perhaps due to HL having its own multi-manager fund range?
Price seems to have been the determining factor, but Dampier is adamant that all funds selected were ones that he and the team would be happy to personally invest in.
The group is very aware of its success. Its Investment Times client newsletter has a circulation of 500,000, which hits more people than the broadsheets and says he fully expects greater pressure from the wealth management community to share its voice.
David Coombs, head of multi-asset at Rathbones Investment Management has already voiced his position of demanding same terms for the volumes he can push and others are expected to follow.
A price now outweighs performance (clearly, as M&G's Recovery fund gained a place despite its disappointing three-year numbers), how much margin is left to squeeze?
There lies a huge opportunity for the operational divisions if re-registration into cheaper share classes will accelerate but if volume buys the cheap seats but for a larger audience, once again the more esoteric, niche investment areas will be left to the domain of the sophisticated investor, one who can afford specialist wealth management services. And all of a sudden their core holdings may begin to look very different.
