One in three fund investors are holding the most expensive share class of their fund, rather than cheaper commission-free or ‘clean’ share classes. Typically, these investors pay around a third more for the same fund than they would in the clean share class, as we explain below.
The research, carried out by Fitz Partners, found that 34 per cent of retail assets invested in UK funds are invested in old-style commission-paying share classes. New investors can no longer put their money into this type of share class because, under new rules that were first ushered in at the start of 2013, commission payments have been banned. Prior to the new rules being introduced as part of the Retail Distribution Review (RDR), financial advisers pocketed commission payments from fund managers when recommending their products.
The banning of commission has forced financial advisers to charge consumers directly for advice. It was thought that as well as potential bias being removed from advisers' recommendations, fund charges would become more transparent for investors.
As the old-style commission-paying share classes were then out of bounds, existing investors with fund platform accounts were gradually moved by their fund platforms over to the newly created 'clean share classes', which are commission-free.
Investors who use an online broker, either in their own right or through a financial adviser, will therefore now find themselves investing in commission-free funds via ‘clean’ share classes. They will pay a separate fee to their broker: either a fixed fee or one based on a percentage of their investment.
However, the commission ban does not apply where a financial adviser or self-directed investor buys assets directly through a fund management company rather than via a platform. Those who ‘go straight to the manufacturer’ in this way still incur commission charges.
Similarly, investors who have in the past invested directly with a fund management company themselves, without an adviser, are not being moved into clean funds, as the fund management group is not required to transfer them.
As things stand, those who invested directly with the fund group via an adviser still have commission (typically 0.5 per cent) paid to the adviser, even if they are no longer receiving any service. Directly invested self-directed investors, meanwhile, simply pay commission fees to the fund manager for non-existent advice.
In most cases switching from old-style commission share classes to new clean versions would be in the investors’ best interest. Typically, the old commission-paying share classes have an ongoing charges figure of 1.7 per cent.
The clean share class normally costs half as much, on average 0.85 per cent. Even when the variable broker fee is factored in, the typical all-in fund cost comes in at between 1.1 and 1.3 per cent. Therefore, going down the direct route is therefore typically around a third more expensive.
Hugues Gillibert, chief executive at Fitz Partners, says the amount of assets held in the old-style share classes ‘remains high’. Gillibert adds that 70 per cent of retail investors’ money was held in commission-paying share classes in 2013, and has been falling steadily by about 10 per cent each year since.
‘The proportion of retail investors’ assets in UK funds invested in fully loaded share classes that still pay trail commissions to advisers remains high at 34 per cent, and retail investors might be missing out on potential savings and better returns,’ he says.
As part of its review into the asset management industry, the Financial Conduct Authority suggested some remedies for fund managers to enable them to move direct investors from ‘expensive to better value share classes’.
Firmer action from the regulator may be forthcoming next month when it releases a policy statement on the various remedies it has called on the fund management industry to implement.
Two years ago, Money Observer called on fund managers to at the very least write to customers in higher-paying share classes to explain they could move their money elsewhere and own the same fund at a cheaper price.
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