The end to commission models following the introduction of the retail distribution review (RDR) has already provided the backdrop for wide-ranging changes to the shape of financial services.
But over the next 12 months we are likely to witness further reshaping as the two-year period of grace given to legacy assets comes to an end.
Since April 2014, platforms have had to separate out fees for using services. So any new assets held on platforms since that date will now be in ‘clean’ share classes. Prior to this date, most assets were held in ‘bundled’ share classes that did not explicitly separate fees and commission paid to advisers.
These assets have to be transferred to the more transparent clean share classes by April 2016. Called the ‘sunset clause’, any legacy assets still in bundled share classes on this date will automatically be transferred to an equivalent ‘clean’ share class, and any commission paid to advisers will be turned off.
While the transition is already well under way for many IFAs and their clients, some IFAs have yet to navigate the forthcoming changes. The first thing IFAs need to bear in mind is that transitioning is not a choice, it is a requirement, and with only 12 months left to fully complete the exercise, managing the impact now is essential.
A second important point is that the speed and method of transitioning is not entirely in the hands of the IFA. Fund managers and platforms are also bound to abide by these rules and, naturally, both will have their own plans in place for the treatment of legacy assets.
Indeed some of the larger players have already completed the exercise of moving legacy assets over from unbundled to clean share classes and turned off commission payments ahead of the 2016 deadline.
IFAs will have no doubt already have received information from their platform providers about any plans in place. In the main, these are practical issues to do with the actual movement to clean share classes. For platforms the process begins by identifying those clients who are not currently in clean share classes.
While timescales will differ, once clients have been identified it is then a question of informing IFAs that action is required and offering up a deadline. The final element is processing all switches and confirming same to clients.
While sounding straightforward, the process can introduce certain complications. For example, some funds have a variety of clean share class options to choose from. Also if, while this process is taking place, a client invests new money, there may be an interim period where they will get a statement showing holdings in two versions of the same fund. This can be quite confusing for both the IFA and the client.
Of course, alongside the practical issues there are business and regulatory matters that IFAs need to consider – not least refreshing business strategies to plug the gap that will be left when commission is no longer available for established assets. Ongoing regulatory issues include transparency and due diligence whereby regulators continue to look at IFAs’ use of platforms and how they justify choice and cost to clients.
