Do you remember the far-reaching overhaul of the financial services industry known as the Retail Distribution Review, which came into force from the start of 2013? The aim, as far as the Financial Conduct Authority (FCA) was concerned, was to create a ‘resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning’.
On one hand, RDR has succeeded in its aims. But it's created other problems for consumers as it has taken effect too. One issue in particular was highlighted for me the other day, when a reader rang Money Observer at the end of his tether.
His mission had been a simple one – to top up an existing tranche of Fundsmith Equity units held through an online platform. When he went to the broker website he found himself faced with a choice of two share classes – T and I. There was a marginal difference of about 3p in price and fund charges were 0.1 per cent higher for the T share class, at 1.06 against 0.96 per cent.
He was keen to know what the significance of this choice was for consumers, so he rang the broker’s helpline. They seemed bemused by the question but had no insight, taking the line that as an execution-only broker, they just sold what they were given by the fund group. ‘Why not call Fundsmith?’ they suggested.
Fundsmith was even less illuminating. The customer services adviser told him that the I share class stood for ‘institutional’ and stipulated a much higher minimum investment of £500,000; yet there were I shares on the broker website, readily available to anyone with a spare £20 to tuck away. Indeed, said our reader, his existing holdings, bought a couple of years ago, were I shares.
Increasingly riled, he rang another large broker, which similarly offered both share classes, to see if they could shed any light on the difference. ‘I think T stands for telephone and I is for internet,’ proposed the customer services guru.
In the end he went back to his original broker and topped up his holding of I class shares, to keep things simple for himself. But his gripe is a very valid one. As he says: ‘Small investors like me are being encouraged to take control and invest our own pensions; I try hard to do the research and make informed decisions, but these investments have got to be sold more professionally and more transparently. Why can’t we be told what the significance of the different classes is? Fund managers seem to excel at keeping people in the dark.’
Both Fundsmith Equity share classes in fact count as ‘clean’ – with no commission built into charges. Both also stipulate a £20 minimum contribution on broker platforms – though if you go direct to Fundsmith’s website it’s all much clearer and you’ll be channelled straight into the T class, where you have a choice of either accumulation or income units.
However, most investors buy through platforms these days, and it’s hard from a consumer perspective to understand the rationale for fund managers to have more than one share class available to private investors. Why do fund managers not simply rationalise their lists to keep things straightforward in such situations?
A Fundsmith spokesperson explains that although the I share class is for institutional investors, ‘because retail platforms are clients for Fundsmith, they have access to invest in/offer the institutional share class’. But if platforms have that option, why don’t they just offer the cheapest choice for consumer investors?
All options available
When I put that question to Rebecca O’Keeffe, investment director at our sister broker Interactive Investor, she explained: ‘Fund management groups often offer multiple share classes. As an execution-only provider, where the fund manager offers us the choice of fund classes in advance, we will choose to only off er the cheapest class available. However, sometimes, new cheaper share classes are introduced later, or a fund manager lists multiple classes for investors; in which case, as a whole-of-market provider, we will offer all options.
‘We appreciate that multiple share classes can cause confusion and we do try, where possible, to only list the cheapest class available. However, in those cases where more than one class is listed, the customer gets to make the choice from all the relevant and easily available information on the fact sheet and key information document.’ The quest for transparency continues.
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