The Financial Services Authority (FSA) published their Consultation Paper CP10/29 in November 2010, looking at the role of investment platforms in the delivery of the Retail Distribution Review (RDR).
This week we submitted our feedback to this consultation, as follows:
I am writing with my response to the above consultation paper.
We are a directly authorised firm of Chartered Financial Planners with eight approved persons and four additional employees. We make use of ‘wrap’ and fund supermarket platforms for the implementation of our investment and pension advice.
I understand that this consultation paper was effectively proposing a ban on the ‘cash rebates’ fund managers currently pay into the client cash account on wrap platforms. The paper suggested that this value could be passed to clients by crediting units to the clients holding or utilising new net share classes.
We are opposed to this proposed cash rebate ban and I am writing to explain why cash rebates should remain acceptable.
Firstly, the assumption that IFAs offset cash rebates against their advice charges is in our opinion incorrect. If this practice does exist, and we have not seen any evidence from our peers that is does, then the actions of a few advisers should be the focus of your attention, rather than imposing any kind of blanket ban on the entire advisory community.
Secondly, the two proposed methods for passing value back from fund managers (crediting units or creating net share classes) pose technical challenges that could also lead to a poor consumer outcome. For example, there are trading and taxation issues to address if you mandate crediting units in funds. There would be issues around fund availability if you decide to mandate the use of net share classes on platforms.
Thirdly, we already use a number of funds which do not provide cash rebates, such as Exchange Traded Funds (ETFs) and passive funds. Our focus is always on the net price of the fund, after the cash rebate has been applied, and this is the fund price we will communicate to our clients when recommending the use of a wrap platform.
We suggest that the FSA maintains the availability of cash rebates as an option and achieves its objectives through more robust disclosure requirements on both advisers and platforms.
We would argue that all advisers and platforms need to disclose the total cost and three component costs to their clients – i.e. the net fund management cost, the wrap/platform cost and the adviser cost. This disclosure requirement should be applied equally to all wrap platforms and fund supermarkets, including those operating on an ‘execution only’ basis. Consumers should know the total cost of investing and where their money is going.
Robust disclosure requirements would bring a swift end to any examples you have identified of advisers misleading their clients by suggesting that somehow cash rebates make their services ‘free’.
Please do let us know if we can assist you by providing any case study examples of how cash rebates are used in practice, in a transparent and consumer-centric fashion.
We look forward to seeing the outcome of this consultation process in due course.
