The January sales represent a great example of supply-demand economics.
There are interesting parallels to be drawn with the FSA’s RDR proposals for platforms. In March last year, the original thoughts from Canary Towers were to ban any form of rebate to investors from providers. This would have been a retrograde step, as investors would be prevented from getting a better deal due to regulation. In November, we had a U-turn, with rebates to investors, or as I would call them, discounts, being allowed – but only if they are reinvested as units. This is a positive step by the FSA, albeit one hidden with various complexities.
In many cases, this will create deals worth only a few pounds and will significantly increase the number of transactions for fund managers. For some bigger platforms, such as ours, this will be quite manageable but others may find it more difficult.
In addition, there is no mention in the proposals for what happens if a client sells his or her holdings before they receive their reinvestment units if you cannot buy the units in the marketplace, or recognising that reinvestment deals will be less tax-efficient than paying cash.
Finally, it is worth remembering that all this only applies where advice is given and only to instructions placed after 2012, so execution-only investors and those investors with legacy holdings will still continue to receive cash rebates. Confusing? Think of the poor investor. Making some kind of sense of all this will be a task for providers, platforms, and perhaps, most important, for you as advisers.
The FSA seems to believe that by enforcing reinvestment of rebates, this may avoid any potential product bias that could exist by paying higher rebates. Also, by enforcing reinvestment, it is perceived this will stop unnecessary and especially blanket usage of rebates, so they become the exception rather than the rule.
Where do I think the overall market is heading? The overall effect of the RDR will see further adoption of net commission products, with an active retail fund typically costing around 100 bps, with adviser fees added on top. This is far cleaner than the alternative of keeping the fund price where it is today and always rebating back to the customer.
If I am correct on this, then the attractiveness of paying rebates to investors will be lessened and become the exception, targeted only on specific areas. In this scenario, the likelihood of a rebate ever being used to create bias would be limited due to the fact it would not even cover the platform’s, let alone the adviser’s fees.
For these reasons, I do not see a big problem with allowing cash rebates from providers to investors and I would recommend the FSA to review this area again. Allowing cash rebates but having better FSA monitoring and supervision seems sensible. In a market which is often too complex, what we need is a regulatory environment that drives simplicity.
Ed Dymott is head of UK fund partners at Fidelity International