Two-thirds of funds with clean share classes are more expensive than pre-retail distribution review (RDR) versions of the same funds, according to research by consultancy Adviser Asset.
The firm has written to the Financial Services Authority (FSA) to express concern over its findings which showed that out of 1,317 clean shares classes in 66.4% of cases the fund could be obtained cheaper through via another share class after the application of rebates.
Adviser Asset director Colin Turton’s findings are based on analysis of funds’ total expense ratios (TERs). While differences in the fee taken by the fund manager from the annual management charge between clean and pre-RDR could account for some of the change, so too could higher additional costs applied by clean funds.
‘The TER is the actual cost that the client gets charged. The AMC can be the same with clean share classes and rebated funds so it is vitally important to focus on the TER,’ said Turton.
The study showed that only 21.6% of the sample funds could be obtained at a lower cost with the clean share class and that the average difference in TERs between clean share classes and pre-RDR versions of the same funds was 25 basis points in favour of pre-RDR share classes.
Graham Dow, head of investment group relationships at Standard Life, said the TER for clean share classes were higher due to lower asset levels, but that the price difference would reduce as these grew.
‘Clean funds are relatively new and there are not as many assets on them,’ he said. ‘Additional expenses are calculated on a percentage of the total assets on the share class, so in the short term clean share classes’ additional expenses are higher than in the bundled,’ he said.
Dow added that the rebate a platform received could also help reduce a fund’s price.
Graham Bentley, head of investment marketing at Skandia, which has long advocated the benefits of unit rebates over clean share classes, said the price differences reflected the competitive edge the larger platforms had to negotiate better terms for clients.
‘If you assume the clean share class on an equity fund is 75 basis points, larger platforms will get it typically for 10 basis points less because of the deals they make,’ he said.
Ian Smith, director of Central Financial Planning, said the price difference between share classes in the same fund made it hard know what was best for clients.
‘It is a bit of a minefield at the moment and you don’t know which the best way to go is,’ he said.