28th February 2013
New rules may have shaken up the world of financial advice, but investors shouldn’t take their eye off the ball with fund platforms set to do battle ahead of round two writes financial journalist Harriet Meyer.
Some execution-only platforms are already shifting their models to a flat-fee for new customers in preparation for the Retail Distribution Review part 2 (RDR2).
The first stage of the Retail Distribution Review, known as RDR1, banned financial advisers from taking commission for selling investments and pensions, so all fees paid by clients are clear and transparent and agreed in advance.
As a result of this shift, asset managers have had to create a “clean” share price for their funds – free of a commission element – for advisers to sell to their customers.
The cheapest way to buy funds, including ISAs, is often via a fund supermarket or discount broker, and RDR2 is expected to insist that these provide investors with a clear, clean share price.
If all goes to plan, any charges taken by discount brokers and their platform fees will be deducted from cash accounts rather than siphoned off thorough a fund’s ongoing charges.
Currently, most discount brokers make either a small or no initial charge when transacting business, but then base their business model on earning ongoing trail or renewal commissions paid by providers.
The implementation of explicit charges is good news for investors, but they may have to wait while the Financial Services Authority (FSA) ponders over how this will work, and it hasn’t given a precise date for that decision.
However, waiting for the changes to come into effect next year could prompt fledgling investors to consider postponing plunging into the market until this upheaval has taken place – but there are already options for the canny investor keen for clear charges.
Patrick Connolly, certified financial planner at AWD Chase de Vere, said: “RDR has meant that those working with an adviser are benefiting from knowing exactly how much they are paying, how they are paying it and what services they are getting in return.
“This has greatly empowered consumers, but one significant group has been largely unaffected by the RDR and that is discount or execution-only brokers, whotransact business through their platforms, direct with consumers, but don’t provide any financial advice.”
Some of the best-known companies in this arena include the likes of Hargreaves Lansdown, Bestinvest, and Chelsea Financial Services.
So far, discount brokers have continued to transact investment and pension business, selling products through platforms which have commission built in and agreeing the amount of commission they are paid with product providers rather than their clients. “But there is change on the horizon,” said Connolly.
Some discount brokers are already taking action in preparation for this shift.
For example, Charles Stanley Direct launched this month, with the cost of investing in a typical fund at 1 per cent per annum, made up of a 0.75 per cent AMC and the 0.25 per cent annual platform fee. “So we are one of the first to launch a clean priced platform, ahead of the regulatory changes,” said Ben Yearsley, head of investment research.
“We aren’t the only ones either, and this is clearly good for investors, especially in a lower return environment.
“At the moment the playing field is pretty level, but from next year when platforms and discount brokers cannot receive commission, it will be quite a chore comparing as they will have to charge a fee, and that can be any way they want to.
“We have chosen a percentage based fee, but it could be on a number of funds, a monthly amount, or dividend collection, for example.”
However, other brokers, including Cavendish Online, have already started to charge a flat-fee for their services, rather than commission.
The changes will have a huge impact on how many discount brokers operate, with new competitors storming the market with better deals for investors.
Rebecca O’Keeffe, head of investing at Interactive Investor, said: “Investors are likely to have the choice between a flat fee model – with the opportunity to buy ‘clean’ funds, and an old style model where there may be some bonus paid, but the provider is likely to keep the majority of the trail commission and platform fee available.
“Investors will be able to self select between these two models, but for investors who have around £20,000 in funds or more they are almost certain to be better off moving to a flat fee provider.
“Given that some current businesses make on average £400 a year from their funds customers, the big old style industry players are certainly going to have significant work to do to persuade their customers that a percentage fee is worth it – when their clients could buy the same fund elsewhere and be significantly better off.”
Interactive Investor was found to be the cheapest fund supermarket in a survey by Candidmoney.com, based an ISA portfolio with £75,000 split equally between five popular funds and £25,000 in shares.
However, website The Platforum voted Hargreaves Lansdown was best overall, but it levies higher charges.
Meanwhile, during this ISA season, some asset managers are cutting costs for investors to attract new customers ahead of these further changes.
For example, Fidelity has announced this month it is halving the cost of stocks and shares ISA for new customers. For investors putting the full-tax-free allowance in an actively managed fund with a typical annual management charge (AMC) of 1.5 per cent this will save around £87.
For investors choosing a Fidelity dual-year Isa, so making separate investments into a 2012-13 and a 2013-14 Isa at the same time, the half-price offer will apply to both. In addition, ISA charges will be waived for any investor who opens a Fidelity self-invested personal pension (Sipp).
Witan Investment Services is waiving the 1% dealing fee for lump-sum postal and telephone investments into its Wisdom ISA until the end of April. Paying the full allowance for the 2012-13 and 2013-14 tax years would see investors benefit from a saving of £228.