Cofunds has announced a “payment choice”. Brokers who use Cofunds can apparently choose whether they take fees or commission. It sounds as if Cofunds is prepared to pay you commission and call it fees.
So, the entire industry’s problem is solved. All life companies, unit trust groups, platforms, and so on, will still pay commission but call it fees. Well done, Mr Eppinger, you have solved the industry’s problems at a stroke.
Now, I do not know what payments by providers to a distributor are called from wherever in the world you come from, Mr Eppinger, but in the UK they are called commission. If you are going to pay your supporting brokers, it is commission. It is also commission if you do not pay VAT so I do not know what you are proposing.
I guess Cofunds is proposing to supply the platform without rebating the 0.5 per cent commission – sorry, fees – to the broker. I therefore assume that it will roll up the 0.5 per cent to the benefit of the ultimate investor. Every single person who supports Cofunds would love that idea because it plays straight into the hands of the discount brokers who do nothing to increase awareness of investment but merely change the position at which the investment is carried out after the hard work of some poor little IFA.
Alternatively, Cofunds could allow the broker to charge fees while Cofunds keeps the 0.5 per cent. Well, I am sure FundsNetwork would vote for that one too.
The real problem is that clients do not understand charges. I have always said the average investor would far prefer to have a 6 per cent discount on a product with an 8 per cent initial charge than have one with an initial charge of 1 per cent and no discount. In fact, there are clients who search unit trust tables and broker websites to buy the fund on which they can get the biggest discount. They do not care about the initial and annual charges or performance.
The problem again is the good old life companies. You can buy a single-premium investment bond and have 100 per cent invested or with some companies you can have 106 per cent allocation. With other companies you can actually buy an honest amount with the front-end charge taken out.
Of course, the 100 per cent allocation means that you probably have a surrender penalty period and the 106 per cent allocation is where they actually buy 106 per cent of units which have a 6 per cent front-end charge and then, of course, there is the penalty charge for early encashment. All very simple.
At least all that shenanigans does not happen with unit trusts but the funds with an honest small initial charge and a reasonable annual management charge are shunned by many investors because “they cannot get as good a deal on them”.
I would like to suggest the villain of the piece. It is as always the marketing departments. The same marketing departments that insisted on high bonuses for with-profits bonds. The same marketing departments that in my opinion misled investors by understating the downside of precipice bonds and have gone berserk in advertising property funds and perpetuated the confusion around charges.
If we are ever to really educate the investing public, we need guidance from the powers that be on a method of disclosing charges that is universal and set in stone.
I would also like to dispense with all the penalty periods whereby someone can be offered what seems like an unbelievable deal to find that they have been locked in for five years while they pay exorbitant annual charges to cover the crazy lack of initial charges running alongside very generous fees. No, I mean commission or do I mean fees?
Peter Hargreaves is managing director of Hargreaves Lansdown