In 2014, the retail distribution review (RDR) brought about the introduction of super clean share classes in the platform world.
Over time we have learned more about the previously invisible disadvantages of such share classes, and it is worth reflecting on what that means for advisers and clients.
The most frequently occurring instance of super clean share classes is where the restriction applies at the platform level: in other words, all clients of adviser firms have access to a share class on platform A, but not on platform B.
What happens when an adviser firm wants to move a client portfolio from platform A to platform B?
Depending on the capabilities of both platforms and the flexibility of the fund manager, there can be a number of outcomes:
- The restricted shares can be reregistered from platform A to platform B, but platform B then has to convert the shares into a class allowed on platform B.
- Platform A converts the restricted shares into a class that can be reregistered to platform B.
- Platform A forces the client to sell the restricted shares and transfers cash only to platform B.
The potential difficulties and disadvantages of each of these outcomes are as follows:
- The fund manager does not allow restricted shares to be registered anywhere other than on platform A. They can never be held, even momentarily, on platform B. And/or platform B does not have the ability to record holdings in the restricted share class, even momentarily.
- Platform A is unable to record holdings in an unrestricted share class, even momentarily. And/or platform A objects to doing the conversion work for commercial reasons.
- The client is out of the market, and may be forced into a capital gains tax liability.
There are other instances where further complications can arise. Consider the following two examples:
(i) Restricted at firm level. This is the second most frequent instance, behind platform level restriction, where all clients of one adviser firm have access to a share class on platform A, but none of the clients of other firms using platform A have access.
(ii) Restricted at client level. In this instance (the least common), one client of one adviser firm has access to a share class on platform A, but none of the other clients of that firm, or of other firms using platform A, have access.
Whatever the case, problems will arise. In the worst case scenario, clients end up with tax bills they would not otherwise have. In most scenarios, there is extra work for everyone to do.
Depending on the contractual flexibility of fund managers and the functional flexibility of platforms, this extra work can add delay and expense.
The question advisers should ask themselves is whether the cost savings of restricted classes outweigh future portability, inertia and expense problems.
The question fund managers should ask themselves is whether they are treating some advisers and clients unfairly because of their choice of platform.
The question for platforms is whether they buy into doing the extra work required to ensure client assets are always truly portable.
Ian Taylor is chief executive of Transact.