Twenty three per cent of private investor money in funds is in more expensive, older share classes of funds that might pay trail commissions to financial advisers, according to research company Fitz Partners. The percentage of private investor assets in more expensive fund share classes in 2013 was over 70 per cent and has been steadily declining over the years. And the average ongoing charge of equity funds' older share classes has fallen too since commission payments to advisers on fund sales were abolished. But older fund share classes are, on average, still 0.59 per cent more expensive than newer share classes.
“The Financial Conduct Authority’s ruling facilitating the transfer of investors to clean share classes 18 months ago has had some effect but maybe not as much as expected, since it would not allow an easy switch of some [private] investors who invested, sometimes decades ago, through an adviser who is still being paid trail commission," said Hugues Gillibert, chief executive officer of Fitz Partners.
Asset managers now have to consider whether it is appropriate to keep fund investors in share classes with higher charges, and while previously they needed consent from investors to do this, now only need to give investors 60 days' notice before moving them into cheaper share classes. But they cannot automatically switch advised investors.
How to check
If you are not sure whether you are in an older, more expensive share class of a fund you should check the statements and literature that you get sent to see what you are being charged. This could be the case if you bought the fund off an adviser prior to 2013 – even if you no longer use the adviser. Then compare the fund's ISIN number and ongoing charge to those of the share classes in the same fund available on direct to consumer platforms such as Hargreaves Lansdown, AJ Bell Youinvest or interactive investor.
If you find that you are in an expensive share class and bought the fund from an adviser who you are still with, speak to them about converting to a cheaper share class.
If you hold your funds via a platform it is more likely that you will be invested in a clean share class. Since 2014 platforms stopped receiving commission payments from fund providers for new investments. With investments made into funds before 2014, platforms are required to rebate the commission incorporated in the fee back to investors.
If you hold an older fund share class via a platform the rebates mean you may be paying the same as with newer, commission-free share classes. But there are still cases where, even with the rebates, the older share classes may still cost more.
“Hargreaves Lansdown communicated to clients where there was a cheaper share class available to them following the implementation of the Retail Distribution Review [which banned commission payments],” said Emma Wall, head of investment analysis at Hargreaves Lansdown. “We continue to alert clients on an ongoing basis to cheaper share classes.”
You can find more details of how to convert to a cheaper share class on Hargreaves Lansdown at https://www.hl.co.uk/my-accounts/how-do-i-guides/convert-my-funds-to-unbundled-units.
If you decide to move to a newer share class in a fund you should contact your platform and request a conversion into cheaper share class – rather than selling the units in the old share class yourself and buying ones in a cheaper share class.
No tax implications
There are no tax implications if you sell one share class and buy another one in the same fund within tax-efficient wrappers such as self invested personal pensions (Sipps) or individual savings accounts (Isas). And a number of platforms, including Hargreaves Lansdown, Bestinvest.co.uk and Fidelity Personal Investing, don’t charge to trade funds.
If you hold older share classes of a fund outside a tax-efficient wrapper, selling them could incur capital gains tax (CGT), but a conversion to another share class would not. And with a conversion you are never out of the market.
Also, some platforms, such as interactive investor, charge to trade funds but not for a conversion.
AJ Bell Youinvest customers, meanwhile, can only put new money into cheaper, newer share classes. This platform also regularly 'sweeps' customers’ accounts and if it finds any older fund share classes it converts them into newer, cheaper share classes.
“If someone wants to transfer their account to us and they hold a [more expensive fund] share class, we’re normally able to accept the transfer – including that fund – and will convert it once the transfer is complete, free of charge,” added Jenny Owen, a spokesperson for AJ Bell Youinvest. "There is no dealing fee for converting funds – when we request this from the asset managers [which run them] they don’t place any deals as they’re not changing funds [but rather] moving to another share class in the same fund. This means that there are no tax liabilities when you convert to a [cheaper] share class."
