Over the past 12 months, we have witnessed a significant increase and move towards clean share classes from the more traditional type of units.
With no consistent naming convention for share classes and having some commonly used terms meaning different things to different companies, the question is, has this area of the industry become clearer for advisers and their clients?
Having different share classes available to invest in is nothing new, nor having different structures of the underlying funds. Several years ago, insurance company-based funds such as mirror funds were more commonly used in the market than they are today with platforms drawing a line under their dominance.
Before looking closely at trying to answer the question posed, let us remind ourselves of the differences between some of the fund/share classes that have been used over the years, before bringing ourselves right up to date.
Mirror funds dominated the market for years. They remain available today, in particular for single premium investment bonds, and provide advisers and their clients access to a wider range styled on the underlying mutual fund, albeit with different cost and pricing structures.
These funds are a ‘copy’ – mirror – of the underlying mutual fund, created by an insurance provider and established under insurance, life and pensions funds rules. Providers launched these funds for their own products and the annual management charges included costs for the fund manager and may have included an element of cost relating to the tax wrapper. Performance of a mirror fund is different from the underlying mutual fund due to the cost differential, taxation and potentially the pricing of the fund being carried out at a different time to the mutual fund it is ‘mirroring’. On the plus side, switching between funds is easy with providers able to match, buy and sell deals within the fund to keep transaction costs low for the customer.
Investments through today’s platforms are directly into the mutual fund itself, aiding transparency of cost and ownership. Similar to mirror funds, many mutual funds have ‘bundled’ costs into one price, challenging the transparency being sought.
With the levels of new business flowing through platforms into mutual funds, bundled share classes are widely used today.
These mutual funds take us closer to transparency but because of how they ‘bundle’ costs into one price they are only a step on the way.
The costs of bundled share classes cover ongoing fund manager charges and expenses including a cost – rebate – for the provider that may or may not be passed onto the client. Units held before the RDR may include an element of trail commission for advisers. Of course, how platforms deal with bundled share classes varies. Many platforms reinvest the rebate into the cash element of a client’s plan, while others retain the rebate to fund their platform services.
In some instances, where a fund house did not offer a rebate or was small in comparison to others, it may have resulted in the platform provider not hosting the fund. Thankfully the steps now taken by the regulator have addressed this. There is also a difference in the level of rebates negotiated between the platform and fund house, so investments in the same fund may result in a lower cost. Through a number of policy statements the regulator has introduced greater disclosure of charges, leading to the costs of units being unbundled. In other words fund management charges and any rebates paid to platforms must be separately identified and disclosed to customers. This certainly supported better understanding, although the regulator wished to go further.
