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Study flags higher costs for two-thirds of clean funds

by Jun Merrett on Feb 25, 2013 at 08:02

Study flags higher costs for two-thirds of clean funds

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.

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25 comments so far. Why not have your say?


Feb 25, 2013 at 08:22

Is this another unintended consequence of RDR? No doubt the FSA will put the blame firmly at the door of adviser firms for this and put out a statement confirming it is the advisers' responsibility to consider all options despite the fact that the FSA were given every opportunity to consider the impact of their actions yet clearly failed miserably in a number of areas such as this one.

As for the higher costs being because the new "clean shares class" have lower assets at this time, I am extremely cynical of that and believe it is simply investment companies profiteering although I am open minded to sound arguments on this point.

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Henry Tapper

Feb 25, 2013 at 08:29

I am none the wiser after reading this article .

If the platform manager is using a clean share price (and my understanding of "clean" is what the Americans call "no load") then surely the price of the no-load fund (after the short term impact on TERs mentioned has been diluted) will shoot ahead. Or is the fund manager trousering all the distribution margin?

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Feb 25, 2013 at 08:30

Surely, a fund group can decide what their additional expenses are for any individual fund. The argument for low asset levels is valid for a brand new fund, but the fund groups can surely exercise a different policy when creating a new share class of an existing fund. They could take the view at the outset that if they make the new share class at least cost neutral, most new money and more than likely conversions will boost asset levels very quickly.

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Charles Rickards

Feb 25, 2013 at 08:31

I too have notice the consumer will pay more for the same as a result of RDR. It may not be much, but it would appear that a lot of product/fund providers have not reduced their charges by as much as the amount previously paid in commission.

In addition I spoke to one fund house recently, who still maintain their full charging structure for direct consumers.

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Feb 25, 2013 at 09:01

The more transparency the better.

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Bob Donaldson

Feb 25, 2013 at 09:04

Show me a poor fund manager and support staff!

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Feb 25, 2013 at 09:11

Maybe this is why fund groups didn't fight against RDR. They saw a bigger piece of the pie for themselves. Very few clients will pay less in fees/charges post RDR.

At least the media can't bash us advisers this time....

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Feb 25, 2013 at 09:19

Transparency costs and this is the invoice I am afraid. Higher fund costs and seperate payment of an adviser charge to boot. Well done to the FSA on making financial servcies that little bit more complicated, more expensive and less affordable for the masses. I wonder what ma would say about it.

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Jonathan Kirby

Feb 25, 2013 at 09:23

As we all know, RDR has been an extremely costly exercise.

The £2bn to £3bn cost has to be met somewhere along the way so why would anyone be surprised that these fund costs are higher?

They will be higher across the board so, yet again, the regulator has managed to achieve the opposite of their well meaning but naive intentions.

They just never learn.

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Graeme Ferguson

Feb 25, 2013 at 09:50

Wow, no surprise here, but my god it is so disturbing! Wouldn't we all like to be a fly on the wall at the FSA meeting when they came up with this day dream!

I believe in cash rebates personally and can't believe that the FSA miss the point"

So we invent a new share class which has no money in it... and they expected it to be cheaper.... a crazy situation!

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Smartone ha

Feb 25, 2013 at 09:54

Why should we all be surprised? RDR has had a huge cost burden on the entire industry. These costs have to go somewhere, and as per my previous rants, they are going to end up on the laps of the investor in the end. Most platforms aren't profitable now, let alone when the FSA ban rebates and their margins are slashed further.

It does make a mockery of the whole plan if you can buy a pre RDR fund for less than a new clean fund !!! Some platforms (FFNW) allow you the choice still, which for me is going against RDR all together.

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Yvonne Goodwin

Feb 25, 2013 at 10:13

This is absolutely not a joke. We are having to spend a great deal of time doing comparisons ourselves in order to be able to advise our clients suitably - amd please don't try to sell me a service that does this for me. My clients and I would much rather be doing financial planning and not comparing pre-RDR with clean share classes but we have no option but to do this. Platforms, you're getting an admin fee - nows the time for you to earn it.

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John Invest

Feb 25, 2013 at 10:27

Not surprised at all by this study. I have been finding examples of higher costs from both Fund Mangement houses and insurance companies alike. @smartone ha you are absoutely right when you say that the RDR has been a huge cost on the industry and the costs have to go somewhere. I remember very well Amanda Bowe addressing our company at a Board meeting some years ago claiming that she believed that the cost of advice would fall as a result of RDR I pointed out to her that if you restrict the supply of a service or product and demand remains contant or rises then the that cost ofservice or product will rise. This is the first thing that you learn in econonmics. We all knew that there would be many less advisers as a result of RDR so there should be no surprises when a study claims that the price of advice has risen as well.

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A Childs View

Feb 25, 2013 at 10:47

It's a big mess. If I'm still able to see the wood from the trees on all this, I've never really understood the push to launch clean share classes just yet. The FSA have talked about banning cash rebates rather than banning rebates per se. This is backed up by the recent 'de minimus' nonsense that's been talked about as a possible way forward in allowing cash for small amounts but units for larger amounts. Cash rebates effectively represent the commercial discount agreed between the distributior and fund provider. Unit rebates would allow the same but require a lot of platform development for all apart from Skandia. Thus far, the FSA have signalled a desire to see rebates paid in unitised form, hence my conclusion that going clean now is jumping the gun. Surely it's obvious that one clean price for all distributors (with the removal of commercial bargaining) will see higher prices? As previous comments state, without rebates (or expensive to build unitised rebate systems) platform costs will have to go up so I expect we'll see the introduction of new % asset holding based charges. Either way, jusy hurry up FSA and show your hand so we can all just get on with it.

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Truly Independent

Feb 25, 2013 at 11:02

In my experience this year on trying to adopt the clean share class funds into our investment proposition, it is mainly the larger fund groups that are now more expensive for clean share classes than their rebate share classes!

They are basically using this as an opportunity to take more margin! You have to applaud some of the smaller fund groups for making their clean share classes cost neutral. I would suggest we all vote with our feet, big isn't always best!! Another example of greed.

Is it any wonder that passive investments are experiencing massive inflows, with TER's from 0.1% to 0.5%.

We try an operate with a total cost of under 2%, including ongoing Adviser Charge, Platform costs and Fund TER. We use mostly passive with some active where we think they can add value.

Would be interested to hear where others think that the ceiling is for total cost now?

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Feb 25, 2013 at 12:08

This is the fault of giving way to the management groups over TER, what it shows and what it does not. The excuse that clean funds have low investments does not wash as they are only sub divisions of the main fund, and as costs are shared, the total holdings in the fund are what matters. The only way to get fund managers and insurance companies to come clean on costs is for each fund to publish their total costs charged against the fund on a calander yearl basis. So fund A charged xx% including percentage research costs, dealing costs, management and trustees fees but adding gross income from lending. Lending fees retained by manager must be included in management fees. Fund B can therefore be compared on a cost basis to fund A as long as the period, (1st Jan-31st Dec perhaps) is the same. After a few years to allow for accounting variations, an accurate picture can be built up. Not that fees are the be all and end all, however if a transparent model is used then competition will mean costs will reduce for the most successful and exessive charges will be flagged up for those who abuse the closed and less successful funds.

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Brian Shearing

Feb 25, 2013 at 12:47

For those funds which are tax paying (unlikely to be UK equity funds) there are tax implications of a lower amc. A reduction in amc from 1.5% to 0.75% means that the TER will 'only' reduce by 0.6%, the other 0.15% will be payable to HMRC. This may not be the whole story but it is a contributory fact. If you want more detail please contact me directly.

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Henry Tapper

Feb 25, 2013 at 13:06

Hicky, don't know who you are but that was a fine post

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Feb 25, 2013 at 13:06

Brian, that may well be true for investment bonds, and it also may be a good reason to include the taxation costs as part of a realistic total costs and fees as a percentage of the funds assets. In order to compare all types of funds there must be a single standard that includes every cost taken from the fund whatever the source. You can then see the additional tax charge from an investment bond to compare it to an ISA/OEIC or UT, and see if the difference makes sense for an individual client and their specific tax requirement.

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Brian Shearing

Feb 25, 2013 at 13:46

Hickky, not sure how investment bonds got into this discussion - my remarks are about OEICs and unit trusts. Basically, if the income exceeds the expenses there will be tax to pay at the rate of 20% inside the fund (bearing in mind that dividends from UK equities are received 'free' of tax). As the RDR classes have lower amcs they will pay more tax. hence my example above.

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Feb 25, 2013 at 14:58

Focusing on 5bps or 10bps and ignoring the quality of the platform solution will again create unintended consequences.

SJP and HL are two of the most successful organisations in our industry and they certainly dont shout about 5bps.

Clients want service and a quality platform at a sensible price not the cheapest.

When things settle down hopefully the platforms will offer both share classes with a functionality to compare costs rather than offering just one solution which could create an additional cost without good reason.

Will advisers move from platform to platform whenever the fund can be obtained cheaper elsewhere or focus on a platform solution fit for the future not living in the past?

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Jon Edwards

Feb 25, 2013 at 15:30

As a private investor, this is rather confusing. A lot of providers had clean share classes anyway - so why the need to create new ones? For example I recently invested in popular funds through Aberdeen "I" class, Blackrock "D" class, and First State "B" class shares. These share classes are not new, and were available to institutional investors for some time. In all of these cases, the clean funds worked out slightly cheaper for me after platform fees, compared to using retail units and paying the platform fee out of the rebated commission. Admittedly I'm not going to get rich on the difference, but maybe over the long term the lower TER on the clean funds will make a worthwhile difference in growth.

Like some other commentators I'm also very sceptical that adding a new share class adds all these extra costs as claimed by Standard Life. Surely additional costs of running the fund beyond the AMC should be shared across all share classes? And lets not forget that funds from firms like Vanguard, and most all investment trusts and ETF's have never paid commission.

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Knowledgable insider

Feb 25, 2013 at 15:35

When will the bunch of missfits passing themselves off as a 'red tape' busting goevrnment wake up to the fact that th e FSA is no more than a self serving bureaucracy only interested in keeping its staff in well paid jobs. Maybe never as they appear to be the same themselves. The incompetence demonstrated by this whole RDR fiasco is beyond belief and yet this government sits idy by allowing a whole industry to be hampered by these fools.

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Feb 25, 2013 at 15:56


I suppose this potential taxation is only the case when expenses are charged against income, rather than capital, on UTs and OEICs. If charged against capital I suppose the TER could be even higher.

I am sorry I mistakenly thought this involved Capital Investment Bonds, although I still fail to see how this mathematical difference effects anything. If an institutional share class and a post RDR share class both have no entry costs and the same management fee, then the TERs should be the same. This article suggests fund management groups are charging 25bps over institutional funds, why?

If a fund manager can allocate a share of research costs to each class of a fund equally, rather than in proportion to the value of each class, then that is not acting fairly.

As I stated earlier, until total costs charged against each share class, including tax, are published on an annualised percentage basis, the fund management companies will run rings around any regulations requiring them to be more transparant about their fees. TERs are as useless as AMCs are when you are attempting to give accurate information to clients about how much they pay for investment services.

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Xiang Xhi

Mar 06, 2013 at 10:12

I am extremery disappointed that the Manek Growth fund has not raunched its new crean share crass. I rove this fund as it has made me a rot of money over the years, but Jayesh appears to be dragging his heers over this new RDR mararky. Quite surprising given his excerrent track record in technorogy.

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