Fund charges; never a popular topic from either the adviser’s or client’s point of view!
And so it’s interesting to see what conclusions the FCA have drawn in the interim report of their Asset Management Study, where they took a look at platform fund charges. The survey covered both ‘advised’ and ‘direct to consumer’ platforms.
In particular, the FCA were examining how platforms negotiate discounts and what impact this has on the final charge.
Not surprisingly, asset managers appreciate the steady flow of funds and larger amount of business that come from platforms. This means they will often discount fund charges and wave initial charges or minimum investment thresholds on funds and share classes. It’s the old economy of scale argument. So, in most cases, you will find the fund charges on platforms are likely to be less than if you are investing directly with asset managers.
But this is not always the case – some platforms are much more successful than others in negotiating discounts. The FCA discovered quite a range; from some ‘execution only’ platforms which had no discounts on any funds, to some platforms offering discounts as high as 11%. And in some cases, the discount was not available across all the funds.
Sometimes, although a discount was being offered, it was often quite small. After analysing the discounts provided by four different platforms for UK equity funds, the FCA discovered that at least 75% of the reduced rates were below 15 basis points (bps). A discount of 38 bps was the highest the FCA came across in the sample.
The study looked at the price of best-selling funds which appeared in the top ten best sellers on two or more platforms for 2015. It’s interesting to note that of the nine most popular funds on more than one platform, five were priced the same and the other four were only priced differently on one platform.
Discounts should not be the only factor to be taken into consideration when choosing a platform. Technology can also drive down cost. In addition, platforms that offer better functionality and alternatives, such as fractional ETFs, are also attractive as they can potentially provide greater opportunity for returns.
The FCA also observed that differences in platform charges meant that choosing the cheapest fund may not always lead to the lowest overall investment cost. It’s important to consider whether the combined cost of the platform charge and the fund charge, be it discounted or not, is cheaper than buying the funds direct.
One thing is clear; the FCA don’t like hidden charges nor do they like ambiguity in terms of pricing. They also noted that ‘while platforms can offer a cheaper route to accessing best-selling funds, there is often no significant difference in the prices of best-selling funds across different platforms.’ But overall, they did conclude that platforms appear to help rather than hinder access to market for asset managers.
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