There is a lot of debate in the platform market about the rights and wrongs of bulk converting clients from retail share class funds to clean share class funds.
There is general agreement that the client should not be detrimented by the conversion, but opinion in other areas is more fragmented; the right to opt-out, the ability of the nominee to decide on behalf of the beneficiary and where advice may be needed.
Aviva is an unbundled platform meaning our charging (platform, adviser, fund and DFM) is all clearly separated for the client and transparently presented to them in their statements and transaction history. I believe the case for unbundled platform converting clients can easily be made if you apply our industry’s charging structure to another better known market, retail. Bundled platforms are a different story altogether, for a different time.
Imagine, rather than ‘Poundland’, you had ‘Percentland’. This retailer offers thousands of lines of products and, rather than have their income embedded in the price of the product, Percentland charges its customers 1 per cent of their total spend.
So far, so good. Each product (akin to units in our world) is sold at their cost price but the supplier needs an income which is applied as a percentage as well, and called an additional management charge. AMCs across the suppliers have not changed in years. But as costs have lowered the retailers have negotiated AMC rebates from the suppliers and are passing these on directly to their customers.
With me so far? I hope so as this is how our industry works.
So, everything is ready for the customer. They walk into Percentland, grab a basket and get shopping. Each product is priced in the same way, so as an example, a large bunch of bananas price tag reads ‘Bananas £3/bunch, AMC 2 per cent, rebate 1 per cent, you pay 1 per cent’.
The shopper does the mental maths and does not mind the complexity because Percentland offers them good value for money compared to their normal shopping experience.
Now they arrive at the till, have their purchases swiped, and notice that they have been charged the full AMC. They are told, when they question this, that they will receive their rebate in a few months once Percentland has raised the invoice and it has been paid by the supplier. The customer thinks, oh well at least I will get it eventually, and Percentland cannot be beaten on value.
The retail regulator does not like this set up at all. It thinks i i’s confusing for customers (I agree) and needs changing so each supplier gives their retailers an AMC that is fair, without a rebate.
To encourage this to happen the retail regulator decides that cash rebates are no longer acceptable and that if a rebate is to be paid it needs to be paid in the product itself. So, in the bananas example, the customer gets their rebate some months down the line in bits of bananas, having been bought and chopped up by the retailer because the supplier continues to pay them in cash anyway.
Then, and this is where it gets really incredible, the taxman looks at the retail market and decides that the rebates the customer gets should be treated as income and taxed where appropriate.
So, for those poor shoppers who only live near an ‘Unwrapped Percentland’, their rebated banana bits are reduced by 20 per cent and this amount is given to the Government.
You are probably shaking your head in disbelief by now, refusing to accept such a fantastic story. Yet the reality is that this is exactly where our market is at the moment.
You are thinking, why have such a complicated system when you could price the products much simply without the rebate, as the regulator wants. Surely, ‘Bananas £3/bunch, AMC 1 per cent’, is much easier to understand.
We have completed the addition of all the clean share class funds and intend to progress our bulk conversion work as soon as the FCA clarify their guidance requirements. We want to be easy to do business with and as simple for customers to understand as possible.
Where they are not disadvantaged by a conversion, surely unbundled platforms have a duty to perform the bulk conversions for their clients. As much for their sanity, if nothing else.
Phil Ralli is head of platform propositions at Aviva