For sometime now I have campaigned strongly, and in isolation, that cash rebates are not in the customer’s best interest. Customers invest via platforms to accumulate units in funds, they do not use platforms to hold cash. Over time, unit rebates will have a compound effect on growth, making them far more advantageous than cash.
The problem with cash rebates, which the FSA consumer research supports, is that customers do not view the cash accounts as being theirs, but rather a ‘mechanism from which their adviser could be paid’.
From a customer perspective cash rebates could create confusion around exactly how much they are paying for both the platform and advice. This is because the platform charge and advice costs can be automatically deducted from their cash account which is funded by cash rebates rather than the investor. Even when fully disclosed, there remains a real possibility that investors could think their platform and advice costs are paid for by the rebates they receive. This is much closer to the current commission regime than it is to the new adviser charging regime.
So where do wrap providers go now?
The decision by the FSA is blow to wrap providers, and will no doubt have a detrimental impact. It will be a complete change to their business model to move away from cash rebates into unit rebates, but in my opinion it is something they must do in order to stay competitive.
Many fund groups have confirmed that a platform rebate will still be available post RDR and even fund groups who have announced 75bps share classes post RDR could still negotiate with platforms to offer some level of rebate. The main platforms will continue to use their scale to ensure the best possible net price from fund groups for the benefit of their customers.
Wraps also face challenges around the future of their cash accounts. If these accounts are no longer being funded by cash rebates, one could argue what their purpose is. There are other ways to manage cash for a customer, rather than using a platform cash account. Indeed in some scenarios it is more advantageous to take adviser charges out of the product wrapper rather than use a central cash account. For example, in a pension, it could be more cost effective to take charges from within the pension wrapper to benefit from tax relief.
It is also great news that non-advised platforms are included, as this will help create a level playing field. In the new RDR world, all charges should be completely transparent, and it is important that advised and non advised routes are treated equally to prevent bias.
Peter Mann is chief executive of Skandia UK