Question
I use a funds broker who rebates both sales commission and part of trail commission. I make my own investment decision and receive no advice from the broker. Is the proposed abolition of commission to financial advisers results in investors paying the full funds managers initial charges?
With no commission being paid by funds managers there will be no incentive to use funds supermarket for investments in unit trust/OIEC. The loser will be the investor in the case of unit trusts/OIEC with the full charges being applied. So fund managers must all agree with the proposal because investors will have no choice but to go direct to them.
And will this be the end of Funds Supermarket?Answer
Based on the FSA announcements to date, this is my understanding of how fund charging might work from 2013.
The abolition of commission means that it will no longer be built into product (e.g. fund) charges. For example, a fund currently charging 3% initially and 1.5% annually will likely reduce its charges to 0% initially and 1% annually (assuming 3% initial and 0.5% annual commission). Any fees you pay for financial advice will be negotiated between you and your financial adviser, i.e. they’re independent of product charges.
The FSA has also proposed that product providers will no longer be able to pay fund supermarkets for administering their funds. This cost seems to average about 0.25% a year, so in theory we’d see annual fund charges fall by the same amount, meaning an annual charge of 0.75% in our above example. However, the fund supermarkets would instead charge investors, so you’ll probably still end up paying a total of around 1% annually, but you’ll be able to clearly compare the costs of using different fund supermarkets.
This means if you’re taking advice you can expect a typical fund to have no initial charge, annual charges of 0.75% and to pay a platform (fund supermarket) fee of about 0.25% a year. Will this mean it’s cheaper to buy direct from fund providers? (i.e. avoid the platform fee). Not necessarily, one of the key reasons providers pay platforms is that it removes their administrative burden, i.e. they don’t have to deal directly with the public and produce valuations etc, which saves them money. So funds bought directly might end up having an additional charge to reflect this.
There’s one final twist, the FSA does not intend to stop commission payments for ‘non-advised sales’, i.e. execution-only business (as is the case with most discount brokers). So we could end up having the strange situation where (ignoring any fees paid for advice) funds are cheaper through a financial adviser than a discount broker.
Will discount brokers be able to offer any cost advantage if you don’t want to pay for advice? I think it depends on whether fund supermarkets decide to compete head on. However, as discount brokers currently generate a lot of platform business this is probably unlikely, meaning fund supermarkets will have to charge more for buying direct from them than via a discount broker (else discount brokers will have no way of being cheaper unless they run their own platform and make money that way) – although this doesn’t make much sense to me.
Bottom line, I very much doubt you’ll end up paying more and there’s a chance of paying less – I’m just not quite sure as yet whether it’ll be through a discount broker or directly with a platform or fund provider.
I use a funds broker who rebates both sales commission and part of trail commission. I make my own investment decision and receive no advice from the broker. Is the proposed abolition of commission to financial advisers results in investors paying the full funds managers initial charges?
With no commission being paid by funds managers there will be no incentive to use funds supermarket for investments in unit trust/OIEC. The loser will be the investor in the case of unit trusts/OIEC with the full charges being applied. So fund managers must all agree with the proposal because investors will have no choice but to go direct to them.
And will this be the end of Funds Supermarket?Answer
Based on the FSA announcements to date, this is my understanding of how fund charging might work from 2013.
The abolition of commission means that it will no longer be built into product (e.g. fund) charges. For example, a fund currently charging 3% initially and 1.5% annually will likely reduce its charges to 0% initially and 1% annually (assuming 3% initial and 0.5% annual commission). Any fees you pay for financial advice will be negotiated between you and your financial adviser, i.e. they’re independent of product charges.
The FSA has also proposed that product providers will no longer be able to pay fund supermarkets for administering their funds. This cost seems to average about 0.25% a year, so in theory we’d see annual fund charges fall by the same amount, meaning an annual charge of 0.75% in our above example. However, the fund supermarkets would instead charge investors, so you’ll probably still end up paying a total of around 1% annually, but you’ll be able to clearly compare the costs of using different fund supermarkets.
This means if you’re taking advice you can expect a typical fund to have no initial charge, annual charges of 0.75% and to pay a platform (fund supermarket) fee of about 0.25% a year. Will this mean it’s cheaper to buy direct from fund providers? (i.e. avoid the platform fee). Not necessarily, one of the key reasons providers pay platforms is that it removes their administrative burden, i.e. they don’t have to deal directly with the public and produce valuations etc, which saves them money. So funds bought directly might end up having an additional charge to reflect this.
There’s one final twist, the FSA does not intend to stop commission payments for ‘non-advised sales’, i.e. execution-only business (as is the case with most discount brokers). So we could end up having the strange situation where (ignoring any fees paid for advice) funds are cheaper through a financial adviser than a discount broker.
Will discount brokers be able to offer any cost advantage if you don’t want to pay for advice? I think it depends on whether fund supermarkets decide to compete head on. However, as discount brokers currently generate a lot of platform business this is probably unlikely, meaning fund supermarkets will have to charge more for buying direct from them than via a discount broker (else discount brokers will have no way of being cheaper unless they run their own platform and make money that way) – although this doesn’t make much sense to me.
Bottom line, I very much doubt you’ll end up paying more and there’s a chance of paying less – I’m just not quite sure as yet whether it’ll be through a discount broker or directly with a platform or fund provider.
Read this Q and A at http://www.candidmoney.com/questions/question179.aspx
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