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Ben Cocks: Switching conundrum shows holes in platform competition

I have a holding in a well-known UK equity fund via a popular platform. My platform has recently negotiated a 10 basis points discount on fund charges in the form of a new discounted share class.

All good so far. In fact, the FCA will be delighted that competition is working so well.

The problem is that my platform does not support conversions, instead insisting that if I want the new share class I must switch out of the old share class and into the new one.

A switch has a number of drawbacks compared with a conversion. Firstly, I will be out of the market briefly, which in these volatile times could be costly.

Secondly, on a unit trust I would suffer a loss on the bid offer spread and on an Oeic, if I was unlucky, I might lose out on an adversely swinging single price. Lastly, I might also suffer a capital gains tax hit on unwrapped funds.

And there could be worse to come.

If I was to switch to the new discounted share class and then sometime later decided to transfer to a different platform for some better deal or some new features it’s unlikely I would be able to transfer the holding in-specie.

My new platform probably couldn’t hold this particular discounted share class and would offer some other, possibly even better value, share class.

Some platforms claim that in some cases they can arrange the necessary conversions but for the vast majority of these cases the holding is sold at the old platform and rebought at the new platform. Another short period out of the market and another potential loss on trading.

This has made me think twice about switching. And if I don’t switch then the competition that appears to be working at the distributor level isn’t working for me, the consumer. In other words: it isn’t working.

There are solutions to the problem. The market practice standards group UKFMPG  has had an agreed design for a conversions process on the table for some years but, as is so often the case, it’s a lot easier to come up with a good idea than it is to get it adopted.

It will probably take a prompt from the regulator to push this higher up the industry’s agenda, just as it did for in-specie transfers more generally in the form of RDR.

Right now, the FCA has its focus elsewhere, so it looks like I’ll be paying that extra 10bps for a while yet.

Ben Cocks is business systems director at Altus Consulting

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Presumably, pushing this up the FCA’s agenda is also Ben’s agenda as chair of UKFMPG and which also directly benefits Altus?

    It’s also not clear to me where the problem actually lies. I’m not convinced it’s a platform issue alone. Indeed, there is a regulatory element here, and this problem was partly as a consequence of RDR, was pointed out well beforehand… and ignored.

    • I think the author of this article has the CGT issue wrong. As far as my understanding goes, if you switch 100% out of one class of share into another under the same ‘umbrella fund’, regardless of whether it is a conversion of not, then it is not a CGT event.

      The other issues i’d agree with, in particular about the issue with re-registrations.

  2. […] A solution of sorts appeared in the form of “Superclean” shareclasses. Rather than paying the discount to the client via a rebate, these funds have a lower ongoing charge, negotiated on behalf of the client by the provider. However, these come with a couple of big downsides. Firstly, it’s another shareclass for asset managers and providers to administer, and this in turn creates complexity for advisers and clients alike as they are forced to wade through multiple versions of the same fund. And secondly, it creates a barrier to exit. If you want to move away from one provider and you are invested in a superclean shareclass it can be difficult if not impossible to move these assets without incurring cost and/or time out of the market. And as our friends at Altus have recently observed, this is an issue the industry is still struggling to resolve. […]

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