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How fund groups are misusing language (and killing fairies)

Polson-Mark-Lang Cat-300.jpg

I like language, me. We can be creative with it. My favourite example is in the film The Usual Suspects, where Kevin Spacey’s Verbal Kint weaves found words around him into an incredible act of cinematic deceit which nearly didn’t get made because “you can’t lie to the audience.”

Oh yes, you can.

Such a lie, or creative misuse, has been perpetrated on the Great British Investing Public for some time. It’s a masterpiece of prestidigitation, worthy of a Kint. 

And this word is ‘institutional’.

For years, the fund management industry, and sections of the ‘discount broker’ platform industry, sought to assure investors they were no mugs. No manky old retail funds for you, no sir. Only fresh, shiny institutional funds; the ones that institutions would buy. You are not an institution, are you, Mr Client? No? Well, step right up. This is how you get the good stuff.

The trouble was, all that had changed from the standard retail class was that the initial charge was knocked off. The fund itself had an identical retail annual management charge to the version you might get off the shelf, as it were. Now, getting rid of initial charges is good. But we should not confuse that with institutional pricing.

In case anyone’s new, true institutional units or share classes are often called ‘X’ classes, because it sounds cool. They carry very, very low AMCs, sometimes as low as a few basis points for certain funds, and are often used as the basis for bespoke deals with very high minimum sizes.

So institutional classes are a world away from 150 basis points share classes for a typical actively managed equity fund. They are just as far away from a 75bps clean share class. Or a 65bps SUPERCLEANshare class. None of these have anything to do with institutional pricing, and every time we say they do, a fairy dies. That’s a fact.

The real question is – why can’t platforms access institutional funds? With aggregation and disaggregation happening at the platform end, is this just a scale thing?  Is it the nature of advisory business? Platforms which hold their own discretionary permissions such as Fusion Wealth and Parmenion boast of being able to aggregate and access those share classes. Why can’t others?

We spend a long time – me especially – obsessing about 10 basis points on a SUPERCLEANdeal or 5bps on platform charging. But the answer to reforming the total cost of ownership radically is right there. 50bps off, at least, for everyone. Now that would be both super, and clean.

There are, no doubt, many excellent reasons why this cannot be done, all of which are made up by the people who don’t want to sell their funds cheaply. I understand that, but as platforms hit scale the time has surely come to tip the balance away from the guys with the posh lobbies and attractive receptionists, to the enormous numbers of advisers and investors putting their hard-earned into an environment which was always meant to access institutional rates.

This isn’t hard. It’s just us, doing stuff. If we want to, we could do this, and it would make a huge difference.

Mark Polson is principal of The Lang Cat

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Campbell Macpherson 27th November 2013 at 12:07 pm

    Brilliant article as usual, Markus! And I await the answers to your questions with bated (if not baited) breath.

  2. At last the real debate starts. Well done!

  3. Certain ‘platforms’ do not want institutional share classes. Otherwise how would they be able to suggest that their platform is ‘free’ and that they have negotiated better terms for their clients when in reality they are keeping 0.25% trail comission to cover their costs.

  4. You’re getting dangerously close to depriving fund managers of their Christmas getaways in the Caribbean with radical client-centric thinking like this.

  5. Short. Accurate. To the point. And focuses back where the fat is in the system. We know that Wraps have and buy and sell billions of pounds of funds. They surely must be entitled to access these funds and share the benefits with Advisers and clients? We all win. Except the fund managers. Wraps as game changers. Who fancies that as a title?

  6. yep about time ro.

  7. I think pressure is building. True platforms / wraps are showing the way, an administration service which costs… x, the adviser agrees… y, and we choose funds which are… z.

    Transact list the number of Z’s that a client can choose from we explain that we always opt for the cheapest relevant share class to the clients needs. That doesn’t stop the more savvy clients asking why are there several costs for effectively the same thing!!??

    Ah well these are just the negotiated costs for Transact…there are more… Oh really!?

    It is funny when I have to point out to a client that my 0.5% CAR on their £100k is £500pa (cause they cant do maths!) in my bin… and someone getting more dosn’t have to explain their end of the deal or why they charge different prices for different peeps??

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