An interesting development is taking place in the financial services world.
This development has been accelerated by the Retail Distribution Review which the Financial Conduct Authority (FCA) launched at the end of last year. The development centres around a change from ‘Opaqueness’ to ‘Transparency’.
It is fair to say that the financial services sector has a long-standing tradition of products that are pretty much overpriced.
Not only were the UK consumers faced with products that were highly priced but the pricing mechanism was generally confusing.
I remember with some humour the pension product provider some years ago who proudly announced that they had reduced the number of charges on their personal pension product down from 11 to 8!!
Monthly policy fees, so called “capital units”, nil allocation period, bid/offer spreads, enhanced or reduced allocation periods, exit penalties, early retirement penalties, annual management charges and market value reductions.
Whatever the title they all represented some of the consumer money being taken from their savings, investment and pension funds and reducing the overall value. Generally it was only the Actuary who created the product who fully understood what was actually being extracted in charges.
Now don’t get me wrong there have to be charges because the product providers, fund managers and the intermediaries who recommend them do have to be paid.
As far as I am aware there are no charitable institutions in the financial services market who do all this (although I also have fond memories of the consumer at a conference I once spoke at who delighted in telling me he saved with Equitable Life – where are they now? – because they didn’t have any product charges).
But the 2013 financial services model is full steam ahead towards a transparent charged world it is just that we are generally being a bit clumsy in delivering it.
The big debate at the moment is about “clean” funds and indeed “superclean” funds. It is no longer going to be possible for fund managers to include in their annual management charge a payment to a product provider or intermediary.
A simplistic example to describe the point. Imagine an investment fund with an annual management charge of 1.5% per year.
0.25% of that might have been paid to the product provider (typically a platform of some type). 0.5% might have been “commission” to the intermediary and the fund manager would have retained the other 0.75%.
Of course there were deals to be done and fund manager might have offered more to the product provider because of volume of sales, say 0.5% and retained only 0.5% for themselves.
Some might argue that actually it doesn’t matter because the consumer would still end up paying 1.5% and that they really didn’t need to know the split between the three parties.
We beg to differ.
In our view the consumer always needs to know because if they don’t how can they judge the value of the participants? Transparency aids understanding and also aids value judgements.
The FCA wants to end this “bundling” and the payment by the fund manager to product provider and intermediary. This introduces the so called ‘clean’ funds.
Clean, because the 0.75% is paid to the fund manager and there is no transfer of economic value to the provider or intermediary by that fund manager.
But this doesn’t mean any change in total price to the consumer. So the debate moves onto “super clean” funds where the platform provider negotiates even lower fund management charges with the fund manager.
Another example might help. Imagine the fund manager agrees through negotiations to offer a fund charge of 0.5%, if the product provider takes 0.5% and the intermediary charges a further 0.25% then the total charge is now 1.25% (rather than 1.5% in the example before) so good news for the consumer.
Well, yes but only if the product provider doesn’t increase their ‘platform’ fee by 0.25%. And this is our fear.
What ought to result in lower costs for the consumer may not do so. The problem has been the opaqueness of the past where only the total charge was known.
Will superclean funds simply be a sop and a way of keeping overall consumer costs the same?
We favour transparency over opaqueness and we favour lower charges to the consumer over simply splitting the charges cake differently. The outcome may simply not be that simple!
