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Class clash facing funds

Leading fund managers are investigating how best to tackle the FSA retail distribution review proposals on adviser-charging after warning that plans for multiple share classes would be an administrative nightmare.

The RDR consultation paper suggests that fund managers could adapt to adviser-charging by offering a reasonable range of share classes to support different levels of ongoing charges. Investment Management Association senior adviser of retail distribution Andy Maysey said he has heard calls from the adviser sector of up to 15 to 20 share classes.

He says: “It would not work for numerous reasons, such as costs and also the fact that it could be very easy for an adviser to place a client in the wrong share class for ongoing charges and unravelling that could be an admin nightmare for everyone. The platform route for paying ongoing commission is also problematic, given that not all of them offer cash accounts and neither do all platforms offer all funds.”

Hargreaves Lansdown compliance director Nigel Bence says having a large number of share classes could lead to new biases being introduced.

He says: “It would raise issues of consistency for the fund managers and would not make life any easier for the IFA. For example, if Mr and Mrs X came to an IFA wanting a particular product, then an ongoing charge could force them to choose product B, which has 10 share classes, over product A, which may only have three. The whole thing may keep the prejudice of products in place that the RDR is expected to remove.”

On the back of the RDR, JP Morgan Asset Management launched B and C shares across its range, aimed at top-end advisers, with the B share at 1 per cent and C share at 0.75 per cent.

Head of UK sales Jasper Berens says: “There could be too many but it has to go down that route and I expect more firms will offer these B-share classes to vary the trail to the IFA. We have three share classes at the moment and are prepared to offer more if necessary but it could be hazardous for the likes of boutiques because of the extra layer of cost.”

Are there other solutions to the quandary for fund firms?

Investec Asset Management managing director for UK distribution David Aird says he expects there to be more multiple share classes of funds. He says: “We are looking at how we can group certain types of business together and remunerate according to that. We are currently talking to all our distribution channels to figure out groups like institutional, wealth managers, platforms, life companies, general IFAs, guided architecture, retail banks and so on and if we can group them in that way.”

Henderson New Star technical director Stewart Cazier says there are three options for investors and two of them – varying annual charges and adding or taking units would be an administrative nightmare.

He says the third option – deducting from a platform cash account – is the preferable choice, although there are issues. He says: “You could deduct the ongoing charges from a wrapper rather than a product. The only trouble is that life companies have no wrappers so the platform cash account route may well be the best route, with the account being funded through anything from rebates to yield from income funds.

“There will be arguments that platforms do not have every fund on them and that not all have cash accounts but these proposals are three-and-a-half years away so changes can be made for that.”

The proposals say firms could also deal with adviser-charging through platform cash accounts or through schemes to allow consumers to sell units at regular intervals.

Fidelity International UK retail sales Peter Hicks says: “I think it is inevitable that you will have to have at least two share classes, the legacy share class that exists today and still pays commission and the post-RDR share class which is not loaded for commission. Platforms will be able to facilitate adviser-charging without share-class proliferation.”

Skerritt Consultants head of investments Andy Merricks says: “The fear is that a platform would have too much power and would become the new insurance company. We do not want to see the insur-ance industry, which has let us all down, repackaged into platforms.”



Structured argument

I note with interest the “structured argument” put forward by Chris Taylor and Kerry Nelson and it seems to me that Kerry Nelson is trying to “have her cake and eat it too”.


FSA stress tests life offices

The FSA subjected life assurance companies to stress tests earlier this year in order to judge the level of resilience of their capital bases, according to press reports.


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