Franklin Templeton believes its decision to stop offering Isas and Peps could trigger a rash of similar moves from rival fund managers.
Although it admits it is only a small player in the UK market, Templeton says the rationale behind its decision – that rocketing third-party business is increasingly rendering obsolete its status as a plan manager – applies to most companies.
There is no question that many groups are enjoying rising levels of business from life companies, wrappers and, in particular, fund supermarkets. For the smaller players conducting little or no direct business, there is a strong argument for passing on the admin burden.
Whitechurch Securities investment director Gavin Haynes says: “The more boutique-type operations cannot spend lots of money trying to penetrate the direct market. They do not want to have huge admin operations because it is simply not cost-effective.”
He says the rise of supermarkets will help the smaller players in particular because they enable them to lighten the admin and regulatory load without adversely affecting investors. If anything, such platforms offer Isa investors more flexibility by allowing them to switch funds without losing their tax wrapper.
In fact, in an effort to smooth its withdrawal from the market, Templeton has struck a deal with Funds-Network to recommend that clients switch to the platform.
However, while most observers applaud Templeton's decision, many do not see it sparking a trend among the heavier hitters.
Despite the difficulties inherent in administering Isa and Pep business, the groups with coffers full to the brim with marketing money have little incentive to switch to the Templeton model. As far they are concerned, there is no doubt that the advantages in being a plan manager outweigh the negatives.
New Star marketing director Rob Page says: “The great thing about Isa and Pep money, once critical mass has been achieved, is that it is sticky. It tends to stay where it is. But you need to spend a lot of money on marketing to do it properly. For those groups without critical mass, particularly those chasing purely retail or off the page business, getting it right is very difficult.”
Page thinks it is a waste of money for the smaller groups to spend £500,000 or even £1m supporting their Isa brand because their weal-thier rivals – which already boast greater market penetration – are spending substantially more. As New Star has proved, critical mass, especially in the retail arena, is only achievable if you have the resources to attract increasingly scarce business in a highly competitive market.
So what does the shift in distribution mean for the bigger players? According to Jupiter, very little despite the slump in sales over the past three years. Joint managing director Gordon Davidson says: “The big players came to dominate with a mixture of good performance and aggressive advertising. Things have changed and demand has fallen but the fact that people now go to a different shop to buy their Isa really makes little difference. It only means we move from being a manufacturer and distributor to just being a manufacturer.”
Davidson says Jupiter “would not dream” of pulling out of the Isa and Pep market because it expects demand to improve in the near future. With 92,000 direct customers, it also has a sizeable book to service, unlike Templeton, which is the 75th-biggest Pep manager with £4.6m under management, according to the IMA.
But the issue runs much deeper than the divide between the haves and havenots, with a rising number of companies opting for a third way – outsourcing. Companies such as BNP Securities, State Street and Mellon offer services that can be tailored to individual fund managers, relieving them of the admin burden while, ostensibly at least, allowing them to offer their own Isas.
Among the fund firms taking this route are Credit Suisse and Liontrust, which believe outsourcing could be the way forward for a host of smaller players.
Liontrust marketing director Jonathan Harbottle says: “We have 7,000-8,000 clients with about £50m of Isa and Pep money. It is not much but to service them ourselves we would have to hire more staff, upgrade our systems and so on. It is uneconomic. Thirdparty administrators have the infrastructure to do it where we cannot and, importantly, when the customer rings up, they are none the wiser.”
The only hitch is ensuring that the service standards of the fund manager are maintained by the administrator. Harbottle says Liontrust was forced to dispense with the services of one outsourcing firm because of failings in this area but is happy with Bisys, its current administrator. In common with many others, Harbottle doubts whether the bigger companies will pull out of the Isa and Pep market but a number of IFAs believe the cost squeeze will eventually force their hands.
Bates Investment Services head of investments James Dalby says: “Those outside the 20 biggest firms are not doing themselves any favours by staying in the market. They will only really get the benefits from supermarkets once they get rid of the duplication, especially with regard to their existing customers, where they are doubling up cost-wise.”
If one of the major players withdraws, Dalby believes there would be an fiercely contested bunfight between the major supermarkets and wrap accounts, both of which are desperate for funds under management, to secure a deal similar to the one FundsNetwork struck with Templeton.
It may not happen for some time but as the distribution landscape continues to evolve, fund managers could become less keen to offer products which can be sold elsewhere for much less hassle.