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Martin Bamford: Will someone please think of the clients

The rapid adoption of clean share classes should be good news, provided clients’ interests are put first.

Martin-Bamford-MM-blog-2013.jpg

One of the lesser but recurring characters in The Simpsons, my favourite animated TV show, is Helen Lovejoy. Wife of Reverend Timothy Lovejoy, Helen has the catchphrase (often used in times of civic crisis), “Will someone please think of the children?”.

We have our own civic crisis in the retail financial services sector right now. Will someone please think of the clients?

Platforms were blindsided by the timing of the HMRC decision to tax fund rebates. Most had accepted rebates were doomed, but wanted to believe they had at least another year to get their collective acts together on the issue.

When you are keeping your eye on the regulator, it’s the taxman that poses the biggest risk to your business model.

I believe that taxing fund rebates is inherently unfair. How HMRC reached the illogical conclusion that a return of charges paid by an investor constitutes income is beyond rational understanding of the tax system.

It raises the possibility that HMRC will also tax retailer loyalty cards and other cashback schemes. Annual tax bill with your Nectar card statement, anyone?

But the mere fact that rebates are a return of investor charges is at the heart of a wider issue about fairness and transparency. Will someone please think of the clients?

When we announced the charging structure on our new platform for self-directed investors recently, I was shocked at some of the comments from investors who have been used to existing platforms which operate on the basis of rebates and loyalty bonuses.

Perhaps I should not have been surprised, but there is a genuine belief out there that investors are getting platform services for ‘free’.

When you bundle up charges, it is inevitable there will be confusion. Bundled charges are intended to create confusion so margins can be protected.

Fund rebates can work where they are properly explained; where the investor clearly understands they are paying for three components (fund, platform and advice) within their single annual management charge. This robust disclosure is most likely to happen in the advised environment.

Where investors believe they get platform services and/or advice for ‘free’ because of the rebates, the situation is close to them being misled by omission.

Used in this way, rebates and loyalty bonuses are little more than taking with one hand and giving back with another.

Clean funds are the future. Their eventual success was guaranteed by the FCA position on banning cash and unit rebates, for both advised and non-advised platforms. This inevitable success was accelerated by the HMRC decision to tax rebates.

Retail financial services being what it is, nothing can ever be as simple as one set of clean share class funds introduced along with transparent platform and advice charges. Of course it can’t.

Instead, those with massive vested interests feel the need to complexify the situation, negotiating ‘superclean’ funds with fund providers.

This has been defended in the name of delivering lower charges to investors as a benefit of large platform buying power. If that is the eventual outcome, that’s a good thing.

It will be a very bad thing if it creates barriers to re-registration, difficulty making like-for-like comparisons and keeps fund management charges artificially higher than necessary by virtue of reduced downward pressure on prices.

What many of us fear and suspect is that it is a way of protecting platform margins. It’s a failure to recognise that buying power in the modern world of retail financial services vests not with the providers but with the clients.

Will someone please think of the clients as we make the (now rapid) transition to clean funds and transparent pricing? If the history of financial services tells us anything, their priorities are likely to slip lower down the list.

Martin Bamford is managing director of Informed Choice

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. I just wasted five minutes of my life reading this.

  2. Correct analysis by MB. (idiotic response from Anon 8.52 incidentally).

    I honestly can’t see all the fund groups offer every platform their own share class at 0.4%, 0.45%, 0.5% etc etc, it’s totally impracticable.

    What’s happening is that the new rules are taking the UK market closer to the United States’ model, where fund management fees have been much lower for many years. Passives are increasingly common and charge 0.1% – 0.3% typically, and Active funds won’t get away with 0.75% any longer – especially where their returns have failed to beat those trackers.

    Platforms need to compete on service, and their own prices, not any fund rebates they can extract, and that will sort them out over the next few years.

  3. @Anonymous

    It was only 600 words. You should learn to read more quickly.

  4. Well said MB. Anonymous 8:52 seen punching a horse in Newcastle on Sunday I reckon.

  5. Martin

    Yes, yes and thrice yes!

    As you say, do I declare my Nectar points on my next return? This is the result of a disjointed regulator and a treasury absolutely desperate for money. It rather (again) makes a liar of Governments continual bleating about encouraging savings. Please save so that we can tax what we have already taxed.

  6. Not to mention that switching from dirty to clean will also mean removing the trail and most directly held funds don’t seem to facilitate on-going adviser charges.

  7. Chris Macdonald 17th April 2013 at 11:18 am

    Excellent article. Well written and to the point.

    On the contrary to ‘Anon’ I just enjoyed 5 minutes of my life reading this.

  8. Hampshire Yokel 17th April 2013 at 11:54 am

    I wonder whether the ‘Anon’ posting the first comment has any knowledge or interest in this industry.

    Personally, I thought the article was well written and posed some interesting questions.

    How much further could the revenue take this? If they can tax a rebate of charges applied, could they the move on to charging me tax on the discount I negotiated on the purchase of my new car? Seems implausible, but isn’t that the point?

  9. The reason why HMRC has decided to tax fund rebates is so that platforms will sort themselves out sooner rather than later. If they had left these untaxed then there would be no incentive to sort this issue out. Instead of making a charge and then rebating part of it. Just make the initial charge lower.

  10. @Martin B – Good article, worth reading and important to be written.

  11. I fear the clients will lose out with this one – The esiset way will be to scrap the rebates altogether. It would not surprise me if this is what ends up being done. That would be another grave unintended consequence to add to th ever growing list.

  12. An excellent article Martin, one of your best I would say.

    Good luck with the London Marathon tomorrow!

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