Standard Life's fund platform has generated a huge amount of interest from the industry, not least because it is being launched by one of the UK's biggest life companies.
But it has come under particular scrutiny from many fund companies who fear that it could have a big impact on the industry and some of the players on the platform.
The principal reason for their concern is the terms at which the 11 fund companies are believed to have agreed to provide access to their funds. Some are thought to have struck deals which will see then paid north of 50 basis points but others are believed to have accepted Standard's original offer – 30bps.
Many fund groups believe that these terms – or even those up to 10 bps better – are not only totally uneconomic but likely to prompt a new round of renegotiations.
One fund manager on the platform says: “It is a dangerous game. Some groups have totally slashed their fees to get on the panel but competing on fees is a dead-end. The trouble is, where does it end? Standard is a big entrant and it has now set the tone – other distributors are going to be looking at their terms and asking questions.”
In fact, Skandia – the pioneer in the field – has a renegotiation clause triggered when any group signs another deal undercutting its own. Some of Standard's panel members are understood to have already approached Skandia but it will not be the only third-party distributor wonder-ing why the groups are ceding margin to Standard but not to them.
Given that these deals could end up costing groups a fortune through lost margin, why have they been so keen to sign up with a company which has yet to provide any volume?
The main reasons are size and power. Standard is a giant company and very strong in the IFA market, a combination which has clearly led some groups to believe they must be on the platform at any price. But at 30 or 40 bps, they will have to attract huge amounts of business through Standard for it to make commercial sense.
According to one fund manager, each fund will have to pull in £100m at least from day one to counter the loss of margin, an amount few groups are likely to see through the panel for a considerable period of time.
The source says: “Are they going to slash their margins on everything? It is commercial suicide. Servicing retail business is very labour intensive, so what they have done is strike deals which will see them get the downside of the retail market with the lower fees of the institutional market. It doesn't add up.”
So if the groups have to pull in £100m per fund, what is Standard suggesting it can generate for them? One fund manager was told to expect around £250m into its funds over the next three years, which the group – not one of the biggest on the panel – feels is realistic given its performance and Standard's undoubted distribution clout.
But some experts believe the predictions of third-party distributors should be taken with a pinch of salt given their track records and vested interests. One senior source says: “The golden rule of thumb is to reduce the numbers by a factor of between four and 10. There is no way on earth that a second tier group would get £250m in three years. But long may our competitors be that naïve.”
The biggest groups, of course, will be retaining more of their management charge than their smaller counterparts and can expect to pull in more money. But some sources believe that slashing fees will change many groups' business models – their existing books of investors will effectively subsidise the lower margin business – and leave them open to accusations that they will do anything to attract new customers.
One source says: “At best, say 20 per cent of the new fund flows through some products might go into some external funds. These groups are sacrificing their existing book for that fraction of business, putting their whole model at risk. I think some of the groups just thought 'bugger the implications' but I think it is stupid.”
What worries critics most, however, is the message it sends to the Treasury. Despite arguing that a 1 per cent price cap on stakeholder products is untenable, some of the groups have, in one stroke, shown they are prepared to slash margin when it suits them, even if it is uneconomic. One fund manager says: “If I was in the Treasury I would be asking how groups can afford to put their best products in at 30bps but say they can't make the 1 per cent cap. They'll do it for Standard but not for stakeholder.”
Standard simply says it will not comment on fees, arguing that it sets targets for products, not the underlying funds. But, with notable exceptions – groups the size of Fidelity and Schroders do not sell their premium products for 30 to 40bps – it has clearly struck a number of unprecedented and lucrative deals.
Whether they prompt IFAs to use the platform is open to question – there are many major fund groups missing from the panel – but Standard and the groups have set the tone for what looks increasingly like a lower margin future. The Treasury will be pleased.