The Big Theme
2012 was the year in which fund charges became the all important issue facing the industry. Several industry initiatives launched to point out the devastating effects of charges, notably the True and Fair Campaign (http://www.trueandfaircampaign.com/) which argues the investment industry has been using smoke and mirrors to mislead customers on charges for too long.
Fund platforms (the main vehicles via which DIY investors buy funds), driven by a growing awareness of cost among investors and increased regulatory interest in fees and commission, are realising that charges are the business issue they will have to address in 2013.
Costs on funds bought via fund platforms are usually expressed as a percentage, which may not drive home the real damage in pounds and pence done to their investments over time. But a new fund platform is setting out to show investors exactly what is being taken from their funds. If this awareness gathers traction then its higher charging fund platform rivals could lose business. So it’s over to you, the fund investor, to check your charges and, if you don’t like them, to transfer your funds elsewhere.
All platforms want a share of the predicted millions of pounds-worth of new business from self-directed or DIY investors, once the Retail Distribution Review (RDR) comes into force on 1 January 2013. Under the new regime, commission payments to independent financial advisers will be banned. Several industry surveys have shown that investors will not want to pay an up front fee for investment advice and will instead try their luck choosing funds on an execution only basis.
Fund providers have been busy introducing new commission-free fund share classes, in readiness for the RDR. But established fund platforms that are based on commission payments from fund providers also face a change in regulation that will force them to review their business models.
In 2013 the Financial Services Authority’s (FSA) intends to enforce a ban on payments from product providers to fund platforms, plus a ban on cash rebates to customers of fund platforms. The regulator feels that this new rule will promote more transparency as payments from product providers to customers via platforms could disguise the cost of advice and potentially cause product bias. Platform providers will have to look again at their offering and costs to ensure they remain viable in a more transparent world where platform fees are likely to come under pressure.
We have seen evidence of changes creeping in already. Big player Hargreaves Lansdown has already remodelled its tracker fund offering by introducing monthly fees. Some platforms such as Interactive Investor and Alliance Trust Savings believe they are already set up to be aligned with the new regime. Interactive Investors rebates all trail commission to its customers and has introduced a straightforward quarterly fee of £20. Alliance Trust Savings rebates all commissions and charges flat rate administration fees for its services.
It is difficult to predict who will be the winners and losers in this new platform world until the rule change happens. Hargreaves Lansdown has gone on record as saying it can absorb the cost of any rule changes from the regulator. In a stock exchange announcement Hargreaves chief Ian Gorham said: “We firmly believe our business model is flexible enough to deal with any changes we may need to make when the FSA finalise their rules.”
However, several fund platforms have welcomed the changes. For example, Peter Hall, chief executive of Bestinvest, said: “I am very positive about the FSA’s proposals. It is better for clients to be able to see clearly what they are paying for a service. I believe it would be inconsistent to remove fund manager rebates in the advisory space and not do the same in the execution only space. At the moment many investors have very little idea what they are paying for and where they can find the best value. The proposals will also remove the current risk of bias in the marketing and rating of funds where the platform receives a higher rebate.”
Meanwhile, the past two years have seen several fund platform start ups take advantage of new technology to take on their bigger rivals. The battle lines have been drawn up not only over cost and customer service, but functionality and investor education. The beauty of increased competition in among fund platforms is that most of the new information and tools are available for free, enabling investors to cherry pick and then search for the cheapest purchases separately.
Compare costs with Rplan
One of the most interesting new launches is Rplan (www.rplan.co.uk), a fund platform with a firm stance on charges. It goes further than most in trying to educate investors about the various fees they will pay on funds. In fact, it claims to be the only provider in the UK that shows you how much you pay for your investments before you buy them.
Rplan’s new cost comparison tool enables its customers and potential customers to compare Rplan against other fund platforms and discount brokers on initial charges, ongoing charges, dealing charges and any other charges. The tool is available to all free of charge at http://www.rplan.co.uk/compare.
It shows that based on a basket of some popular funds, some of the biggest name platforms in the UK are in fact the most expensive - an investor using his full individual savings account (Isa) allowance over 10 years will pay twice as much in charges with the Nationwide (£15,441) than with the cheapest provider Cavendish Online (£7,519). With Rplan you would pay £8,957.
Charges are reduced if the fund platform or broker discounts initial commissions that are paid when you first buy into the fund. But the big reduction comes from a discount on the trail commission (also called ongoing commissions), charges that are taken from the fund every year.
You can use Rplan’s cost comparison tool to input different investment amounts over various time periods. Plus you can vary it to account for different fund rebalancing frequency. Rebalancing is the process of realigning the weightings of your portfolio of assets. It involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.
Bear in mind that the tool is not perfect because it is based on a basket of popular funds: Newton Global Higher Income, Henderson MM Absolute Return, M&G Optimal Income, Jupiter Merlin Income, Standard Life Global Absolute Return Strategy, M&G Strategic Corporate Bond, M&G Global Dividend, Invesco Perpetual Distribution, Cazenove MM Diversity, Newton Asian Income. Several of these are in Investors Chronicle's list of Top 100 funds, but you will probably hold different investments to these.
However, Andy Creak, co-founder and director at Rplan, says: “This tool will prove very useful to any DIY investor who is waking up to the fact that their current platform is not free after all. The mysteries of renewal commission have enabled too many investors to be lulled into believing these services are free when they are anything but. RDR is going to create hundreds of thousands of new DIY investors as the adviser market shrinks and these new customers need to know that choosing a big name is often the best way to pay over the odds and needlessly erode your investment returns.”
Based on a full Isa investment of £11,280 invested every year over 10 years, and rebalancing five funds every year, you can use the tool to see which fund platforms and discount brokers work out best from a menu of 32 firms. Rplan is only beaten by two firms - both discount brokers - on this basis. The five firms that come out cheapest using Rplan’s tool on this basis are:
Cavendish Online (£7,519)
Cavendish Online has created a fund supermarket powered by FundsNetwork that will have no other charges than the annual AMC applied to the selected fund. As a result of this new facility. Cavendish Online has no initial charges on all funds and 100 per cent rebate of trail commission.
Club Finance is a discount broker that also allows you to invest in funds on other fund platforms and receive discounts. It offers three fund supermarkets, Fidelity FundsNetwork, Skandia and Cofunds with a 75 per cent rebate on the ongoing commission and full rebates of initial commission.
Rplan refunds at least 50 per cent of the commission it receives on funds purchased directly to your bank account, and caps its charges at £15 per month.
Interactive Investor (£9,091)
Interactive Investor has a £10 dealing charge, plus a £20 quarterly fee which includes two trades. They rebate all of the ongoing commission, and some of the platform charges.
Massows rebate 100 per cent of any commission they receive, but charge £144 per year to pay any commission they rebate to your bank account. Additionally, it is not possible to buy or switch investments with Massows.
So how do the other firms fare in Rplan’s example of a full Isa investment of £11,280 invested every year over 10 years, and rebalancing five funds every year?
Stockbrokers The Share Centre doesn't fare so well on fund charges because they don’t rebate any ongoing commission, while Barclays Stockbrokers’s fees are more reasonable. Of the big fund supermarkets, Fidelity FundsNetwork fares worst, while Hargreaves Lansdown and Alliance Trust Savings are head to head on charges.
The Share Centre (£13,886)
The Share Centre has a 1 per cent dealing charge, with a minimum of £7.50, for all funds not in its Platinum 120 list. They also charge a £12.50 +VAT fee per quarter. They don’t rebate any ongoing commission.
Barclays Stockbrokers (£9,598)
Barclays Stockbrokers offers up to 0.2 per cent rebate on the ongoing charge. There is no Isa charge for holdings on Barclays Stockbrokers, but for off-platform holdings there are annual charges (£30 for <£7,500 & £50 for >£7,500).
Fidelity FundsNetwork (£11,105)
Fidelity FundsNetwork offers low initial charges on most funds but has no ongoing commission rebate up to £100k and a 30 per cent rebate above £100k but the client must specifically ask for this.
Hargreaves Lansdown (£9,556)
Hargreaves Lansdown offers discounted initial charges, but has a varying rebate on the ongoing commission depending on which fund is selected, up to 50 per cent.
Alliance Trust Savings (£9,558)
Alliance Trust Savings refund all trail commission, but has an admin fee of £10 + VAT per quarter and online dealing charges of £12.50 per fund.
READ MORE ON FUND CHARGES