As the consultation for the Treasury's Savings and Assets for All paper drew to a close this week, excitement within the fund management community started to grow.
With the introduction of child trust funds now looking increasingly likely, most investment houses are salivating at the prospect of the millions of pounds of new business which the initiative could bring to the industry.
Although the initial investments will be small, the sch-eme has the potential to install a solid equity culture in the UK, leaving almost every young adult holding a small portfolio of investments by the time they leave home. While most children have a bank account by the time they are 10, the child trust fund may create a society where each 10-year-old also has a fund manager.
But the deal is not yet signed and sealed. Autif is
still putting its case to the
Government that child trust funds, or baby bonds as they have become better known, should be allowed to invest in equities. It would be all too
easy for the Treasury to invest all baby bonds into a standard National Savings Post Office account, returning a solid 4-5 per cent a year.
In its response to the Treasury's paper, Autif says the average fund in the UK all companies sector has returned more than three times as much as a typical higher interest bank or building society acc-ount over the past 18 years.
Autif says: “This is not simply a phenomenon of the 1980s and 1990s. For most of the 20th Century, the return achieved on investment in equities was significantly greater than on interest-bearing assets, apart from the first decade.”
Autif members are clearly backing its proposals to secure equity investment as an option for baby bonds. However, M&G is the only asset manager to have been at the heart of negotiations after being invited to a consultation at 11 Dow-ning Street two weeks ago.
Director of sales and marketing opportunities Jeffrey Mushens says: “The idea of investing in cash is totally against the whole objective of the child trust fund proposals. If the idea is to give young adults a financial headstart in life, why pick a form of savings that always trails the field?” The initial indications are that Autif and M&G will get their way.
However, both have a long list of additional features which they would like to be included in the development
of the product.
The main concerns surround costs, which Autif says will be extremely high for baby bond investments, due to the small amounts involved. As a result, it says managers should be allowed to charge at least
2 per cent a year and should not be capped at 1 per cent, as with Cat-standard and stakeholder products.
In its response to the Treasury, Autif continues: “The
proposed sums invested are small by normal standards. But there are significant fixed costs associated with processing accounts. Current costs of holding an account on a care and maintenance basis are estimated to be in excess of £10 a year. Since the initial investment being proposed is £250 or £400 depending on circumstances, it is likely that annual charges of at least 2 per cent will be required to make these accounts commercially viable.
“Although it is not proposed in the consultative document, Autif would urge the Government to resist any calls to impose a 1 per cent cap on annual charges.”
Mushens agrees with Autif. He says the Government is entitled to stipulate that there are no front-end charges on baby bonds but believes fund managers should be able to get proper remuneration through annual charges.
From the IFA's perspective, however, charges are not the main concern.
Most will be far more keen to ensure they are not left out of the baby bond market – a battle that is by no means yet won.
Buried within its response, Autif says it does not believe the charging structure will leave room for advice and instead advocates the introduction of decision trees.
But Bates Investment head of research James Dalby says that picking the right investments could make a difference of several hundred or even thousand pounds for every child, however small the initial amount. He says:
“On an 18- year view, there can be a huge difference between a fund that does well and a fund that just plods along. There is definitely a case for advice.”
Worse still for the IFA is the possibility that the Treasury is considering having just one fund manager as the default option for baby bonds. While this plan could conceivably work well for investors, it could equally leave thousands of children investing in a poor-performing fund not making the most of their investment.
Final decisions have not
yet been taken on the structure of baby bonds but there is
an argument that, as yet, not
all the relevant parties have been consulted.
If the Government is looking to provide children with a good financial footing in life, as it says it is, some IFAs believe advice at a more advanced level than decision trees ought to play a part in the child trust fund scheme.