No bias from bundling, says Cofunds chief

2 July 2010 8:00 am | By Natalie Holt

Cofunds says there is no evidence to suggest a bundled pricing structure creates a bias that needs to be eliminated.

The fund supermarket has published a white paper highlighting what it sees as the key areas of debate emerging from the FSA’s DP10/2 discussion paper.

Cofunds CEO Brett Williams says the argument that bundled pricing somehow influences funds held on platforms is unfounded.
He says: “There is no evidence that there is any kind of bias caused by bundling or unbundling. If bias is what the FSA is trying to solve by banning rebates, then it is trying to solve a problem that does not exist.”

Williams says IFAs should have the right to choose between an unbundled and bundled pricing structure, depending on which is more suitable for their clients.

Cofunds estimates that under an unbundled model its investors could expect charges to rise by between five and 15 basis points while Fidelity claims a £10,000 Isa is, on average, 37 basis points more expensive on an unbundled model compared with a bundled one.

Williams says: “At the moment, 90 per cent of the market operates on bundled pricing. If there was such a huge demand for going unbundled, why don’t people do it? I think it is because IFAs are applying the test of suitability.”

In its paper, Cofunds explains that platforms using bundled models levy fees on fund managers which factor in services such maintaining investor records and registration.

Without rebates, these built-in fees would have to be charged back to the investor.

The paper says: “If we are only able to charge the investor for these administration activities, the investor will end up paying twice - once to the platform and once more to the fund manager through the ad-valorem registration charge embedded within the product.”

To avoid the risk of “double-charging”. Cofunds says platforms should be able to charge this service fee as a fund charge or simply continue withthe current system where the platform charges the product provider for the service.

The crux of Williams’ argument not to ban rebates is that advisers and investors should be able to choose between using a bundled or unbundled platform.

He makes the case that as more platforms have signalled a move to running both models, this makes a rebate ban irrelevant.

Fidelity FundsNetwork, Skandia, and Cofunds have all said that they will look to run bundled and unbundled models in the future.
Williams says: “I do not think the FSA need to legislate for something that is being driven by the market anyway.”

Cofunds wants to work with FSA and the rest of industry to create a total expenses disclosure document.

Rather than drilling into individual fund charges, which Cofunds says would result in investors being more confused, it wants to see a consistent document showing total costs to allow for easier comparisons to be made.

The FSA had planned to issue a follow-up consultation paper to DP10/2 this summer but Williams says the regulator has told him this is likely to be pushed back until September.

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