The FSA has issued a consultation paper indicating that it is considering banning cash rebates on fund platforms and instead insisting that any rebate is used to purchase extra units in the underlying investment fund. This would be completely wrong for a number of reasons.
The retail distribution review is meant to introduce transparency in the industry and enable customer choice through clearer charging structures.
For years, the insurance and investment companies have been able to hide high charges and commission in an impenetrable fog of capital units, allocation periods and exit penalties.
As a fee-based wealth management business, we have used the Transact platform for 10 years and our clients have had no problem understanding that we charge a fee for our service, Transact for theirs and then all commission rebates or other agreed discounts on fund charges, due to platform cost savings, are passed on directly to the client into their Transact cash account.
Being able to identify actual cash in and cash out is infinitely easier to understand and reconcile than the purchase of extra units.
Many other platforms, such as Cofunds and Fidelity FundsNetwork, operate a system of bundled charges which have not resulted in a reduction of costs for consumers.
A typical investment fund annual management charge is 1.5 per cent a year, which includes a 0.5 per cent commission payment to the adviser.
This has remained unchanged through these platforms, with the adviser still getting his 0.5 per cent and the remaining 1 per cent shared between the platform and the fund manager.
By contrast, Transact’s cash rebate model with customer agreed remuneration paid out of the client’s own cash account means that both the adviser and Transact are paid for their services, irrespective of the fund AMC, which Transact are now able to negotiate down, providing savings to the consumer. That is because they are unbundled and transparent. Cash in and cash out.
For consumers to work out the rebate by referring to the number of units and unit price to identify any enhancement cannot possibly be easier than identifying each rebate referred to as £s on their cash account statement.
The administration of extra units in trying to provide accurate reports to clients, particularly when the rebates and units are often added some time after the initial investment, would be extremely complex and costly, with different purchase dates, unit prices and capital gains tax calculations applying.
In conclusion, we have successfully worked with the cash rebate system for 10 years and have never had an occasion when a client has not understood how we or the platform are paid and what it costs them to invest.
The retail financial services sector has been severely criticised for bad practise over the years and such criticism can invariably be laid at the door of commission payments, which in turn encourage poor advice at worst and lack of impartiality at best.
Stephen Girling
Director
SG Wealth Management, Norwich
