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Paying a price for innovation

Fund managers are warning IFAs that innovation in the investment marketplace will, inevitably, add more to initial fees and commission.

As fund firms seek that extra competitive advantage over their rivals, managers say that intermediaries will have to appreciate that new products will only come at a price.

The words of warning come as companies line up their proposition ahead of depolarisation, with asset managers ready to jostle for position on multi-tie panels and predictions that some firms will have to cut fees to remain competitive.

With a debate already raging about the sustainability of performance fees, concerns about the cost of initial fees and commissions have been reawakened by the news that Framlington has realigned its charge and the publication of a new Investment Management Association consultation on the issue.

From February, Framlington will give an initial charge of 5.25 per cent on 18 of its 24 unit trusts to standardise charges.

Clearly, having standardised fees benefits consumers who struggle to wrestle with the diversity of charges but most observers tend to assume wrongdoing when prices go up. Rises in initial charges will have little effect on the majority of IFAs, who would have negotiated a discount with the fund house,but it will have a knock-on effect for smaller firms and execution-only business.

Unsurprisingly, since they are largely unaffected, IFAs have praised the move, saying it will add clarity to Framlington’s charging structure.

The IMA and the FSA want to see more of this from fund management groups. In its latest consultation on the governance of UK authorised collective investment schemes, the IMA calls for a move away from the charging structures in the FSA’s collective investment scheme sourcebook, and a move instead to total expense ratios.

TERs are used to give an overall price of what it costs to buy a fund, not just the annual management charge.

Gartmore multi-manager product specialist Phil Morse says: “Gartmore have just launched its own multi-manager range of funds, and rather than just copy what is already in the market, has tried to be different to create rather than steal market share. Our cautious fund has been set up using the new Nurse (non-Ucits retail scheme) rules.”

This means that Gartmore can invest up to 30 per cent of the fund in cash, up to 10 per cent in specialist investments and up to 20 per cent in property. It can put 20 to 60 per cent in equities – in this case, equity income – and 20 to 60 per cent in fixed interest products, including gilts. The overall charge for this product is 2.07 per cent.

Morse says: “Unfortunately, such innovation does come at a price. At present, our new fund cannot be used as an Isa or Pep because the Inland Revenue rules have not caught up with this new investment flexibility that can only be beneficial to investors.”

IFAs are always keen to work round methods that will give investors as little exposure as possible to fees. In 2003, one of the founding directors of Chartwell Investment Management, Martyn Laverick, started the Discount Club.

Club members paid an annual fee but then rebated all initial and trail commission payments when investing in funds. If members’ commission savings were less than the initial fees they paid, then the club would refund the difference.

Rowan & Co Capital Management head of research Tim Cockerill says that investment decisions of advisers should be based on fund performance and not on fees.

Cockerill says: “Would you go and buy a pair of shoes that don’t fit just because they are cheap? Fund choice should be about performance. As long as you get that right then charges should not matter.

“Charges should not come into it. Even performance fees are not attractive. So fees are cheap because the fund is not performing, but who wants a fund that is not performing? I would rather have one with more expensive fees and better returns.”

Fund management groups are wary of the lack of understanding of some intermediaries when it comes to charges. They acknowledge that there is an education gap that needs to be filled so that IFAs pass on the correct information about charges that clients will pay.

F&C director of communications Jason Hollands says: “Clearly, it is about the fund groups and the IFAs working together. We have to ensure that they have the correct information and ensure they understand how to use the information. Information that is incorrectly interpreted can be a dangerous thing. Just because a fund is more expensive does not mean that we should batten down hatches.

“Some funds are going to be more expensive. Innovation, or something like a technology fund with a load of smaller companies in it, is always going to be more costly. Investors need to understand why this is going to be.”

The debate over payments for intermediaries and investment companies has only been intensified by MPs on the Treasury select committee who have been critical of trail commission.

There will always be a difference of opinion between what consumers want to pay for investments and what they will end up paying. The middle ground is always hard to find, and when the market is riding high and returns are significantly beating cash then no one can complain. It is when the market goes sideways, dissatisfaction creeps in.

Aifa has chosen to tackle the problem head-on and, by recommending the depolarisation menu, has sought to get intermediaries to be clear about the payments they get.

It will not be until the role of fees and charges has been fought out that regulators and legislators can get their teeth into other hurdles, like fund managers voting responsibilities to clients at the annual general meetings of the companies they hold.


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