Three alternative methods of achieving this have been proposed:
• Extra share classes with a lower AMC, for example, 65bps, the so-called super-clean share classes
• Unit rebates
• Zero per cent share classes (where, in effect, the asset manager runs a mandate and bills all expenses to the distributor, but there are tax issues)
Old Mutual and some asset managers favour the unit rebate. It has the advantage of not creating the need for additional share classes, meaning all investors enjoy the same ‘currency’ which they can exchange anywhere, but it is not an elegant solution.
It really seems odd that the FCA is banning a rebate of cash to the investor, but allowing cash in the hands of the asset manager, who turns it to units to be handed over to the platform. The platform then converts the units to cash to give back to the customer.
Can you imagine how a bright journalist will report that one? Only it gets worse. Nobody spoke to the boys and girls at HMRC. When they heard about this they said: “We can tax that”, and they will. That is unless it is small; or, unless it is in a tax wrapper, which some 80 per cent is.
So far, we are guaranteed to confuse advisers, customers and data providers. There is one further little problem.
The rebates received by FSMs contributed to their margins. They need every penny they can get as the profit on platform businesses across the UK are trivial when looked at as one industry.
Discounts in any form go to the customer, or, arguably, to the adviser if fees are being increased from the original 50bps commission. So what is the benefit to the platform? It can only come from gaining greater market share from the wrap users, so the FSMs protect their margin by increasing volumes. One or two of you might have views about that, but there is a bigger point.
Why should asset managers give discounts to platforms that cannot promise volume? They see them as aggregators, not distributors. By their very raison d’etre, IFAs cannot promise volume. They cannot decide in advance where their clients’ money will go.
On the contrary, Hargreaves Lansdown has no such concern. The reason why its wealth 150 is being cut to 30, is the huge volume it can promise, the chosen few who make the successful bids. It has been reported that Hargreaves Lansdown is getting discounts of 25bps. We will see how many are at this level and on which funds. Architas is discounting by 20bps to Elevate. This is an interesting example, because Architas, thereby, in effect, provides Elevate with distribution power. Standard Life and Skandia will also both attempt to leverage their wealth management propositions.
