Question
This question is about the effects on the consumer of the impending so called "Disribution Review" : I hope I have got the right term for these changes. As I understand it ,at present , with investment like unit trusts , the monies gained from the consumer as charges are split 3 ways : between firstly the fund manager , secondly the fund supermarket (if there is one) and thirdly the discount broker (if there is one) . I appreciate that this split may not always apply to every customer but it I think it is quite a common arrangement.
With this set up the fund supermarket gets the smallest slice ( I think) . From a consumer perspective they are , arguably at least , doing the most work . So should we feel fairly lenient towards them and forgive them the numerous mistakes that will inevitably occur as they are covering so much ground , and working for the smallest slice of the cake?
This complicated structure effects not only charges but also the way complaints or mistakes are handled . Mistakes or anomalies can occur as broker feeds his "analysis" into one holdings in a fund supermarket so that you get 2 potential sources of analysis : firstly the fund supermarket's own analysis and secondly the broker's own feed into the fund supermarket which provides a second source of analysis . An example of an anomaly ( or mistake) that could occur under these circumstances would be where the fund supermaket shows an individual fund holding as , for example , say 1% of the portfolio whereas the brokers analysis shows it as 10%. When pressed for an explanation the answer may be something like "well we can only work with the information we are given: And we will let you know if we ever get an answer" . Its not seriuos because I spotted it . But what would happen if an investor made serious investment decisions on the basis of incorrect information . Who would be responsible , the investor , the discount broker or the fund supermarket?
So the customer's relationship with supermarkets and brokers is a bit like that of a patient in the NHS . You would only seriously complain if there was a (death) serious anomaly or fraud and anything else is relatively OK.
Will the Distribution Review re-establish consumer priorites and control or will the financial services industry distribution priorites continue to predominate? Is the apportionment or the "split" of the charges likely to change significantly?Answer
The main objective of the FSA’s Retail Distribution Review (RDR) appears to be preventing remuneration from product providers (i.e. sales commissions) biasing financial advice.
A key proposal is replacing sales commissions with ‘customer agreed remuneration’. This means that if a financial adviser takes their fees from the product they sell (rather than you paying them directly) customers will need to agree this in writing beforehand. In theory their fee for specific advice should be the same regardless of the product sold, removing the risk of bias that inherent with the existing commission system.
RDR will also probably affect the way investment products are priced. At the moment a typical unit trust might charge 3% initially and 1.5% a year, from which 3% initial and 0.5% annual sales commission is paid to financial advisers. Fund supermarkets/platforms might also receive about 0.25% a year, leaving the fund provider with 0.75% annual revenue.
Based on FSA announcements so far it looks like private investors might be offered funds at ‘institutional’ pricing (basically stripped of commissions/platform fees), typically no initial charge and a 0.75% annual fee (with any platform fees payable on top), or at existing levels with the potential for built in ‘commissions’ to be rebated in the form of extra units (net result is similar to reduced charges).
The FSA’s original proposals would have prevented funds from building in fund platform costs, instead charging consumers directly if they opt for this route. But they’ve now u-turned so the c0.25% annual cost can continue to be incorporated within fund charges. I find this disappointing and illogical – far better to have ‘clean’ fund pricing and let consumers choose if they want to pay more for extra services like fund platforms.
Coming to your point about who does/is responsible for what. Always assume that fund platform information is the most accurate. If they make mistakes (e.g. they list wrong fund or number of units), which sometimes happens, then there’s likely a problem with your underlying investments which needs to be sorted out.
Some financial advisers/discount brokers plug this information into their own systems rather than simply re-badging the fund platform web pages/paper valuations as their own. While useful for adding extra information or consolidating holdings from several platforms, it gives scope for errors. These are more likely to be a glitch in the adviser’s/broker’s system rather than actual underlying errors, but can be annoying.
In my view if you use an adviser or broker then they should take responsibility for sorting out all errors and glitches, liaising with fund platforms where necessary. While fund platforms appear to do a lot, the tasks are mostly administrative and should, to a large degree, be automated. Fund managers and financial advisers have the greatest scope to provide good or bad value for money depending on what they deliver in return for their potentially hefty fees.
This question is about the effects on the consumer of the impending so called "Disribution Review" : I hope I have got the right term for these changes. As I understand it ,at present , with investment like unit trusts , the monies gained from the consumer as charges are split 3 ways : between firstly the fund manager , secondly the fund supermarket (if there is one) and thirdly the discount broker (if there is one) . I appreciate that this split may not always apply to every customer but it I think it is quite a common arrangement.
With this set up the fund supermarket gets the smallest slice ( I think) . From a consumer perspective they are , arguably at least , doing the most work . So should we feel fairly lenient towards them and forgive them the numerous mistakes that will inevitably occur as they are covering so much ground , and working for the smallest slice of the cake?
This complicated structure effects not only charges but also the way complaints or mistakes are handled . Mistakes or anomalies can occur as broker feeds his "analysis" into one holdings in a fund supermarket so that you get 2 potential sources of analysis : firstly the fund supermarket's own analysis and secondly the broker's own feed into the fund supermarket which provides a second source of analysis . An example of an anomaly ( or mistake) that could occur under these circumstances would be where the fund supermaket shows an individual fund holding as , for example , say 1% of the portfolio whereas the brokers analysis shows it as 10%. When pressed for an explanation the answer may be something like "well we can only work with the information we are given: And we will let you know if we ever get an answer" . Its not seriuos because I spotted it . But what would happen if an investor made serious investment decisions on the basis of incorrect information . Who would be responsible , the investor , the discount broker or the fund supermarket?
So the customer's relationship with supermarkets and brokers is a bit like that of a patient in the NHS . You would only seriously complain if there was a (death) serious anomaly or fraud and anything else is relatively OK.
Will the Distribution Review re-establish consumer priorites and control or will the financial services industry distribution priorites continue to predominate? Is the apportionment or the "split" of the charges likely to change significantly?Answer
The main objective of the FSA’s Retail Distribution Review (RDR) appears to be preventing remuneration from product providers (i.e. sales commissions) biasing financial advice.
A key proposal is replacing sales commissions with ‘customer agreed remuneration’. This means that if a financial adviser takes their fees from the product they sell (rather than you paying them directly) customers will need to agree this in writing beforehand. In theory their fee for specific advice should be the same regardless of the product sold, removing the risk of bias that inherent with the existing commission system.
RDR will also probably affect the way investment products are priced. At the moment a typical unit trust might charge 3% initially and 1.5% a year, from which 3% initial and 0.5% annual sales commission is paid to financial advisers. Fund supermarkets/platforms might also receive about 0.25% a year, leaving the fund provider with 0.75% annual revenue.
Based on FSA announcements so far it looks like private investors might be offered funds at ‘institutional’ pricing (basically stripped of commissions/platform fees), typically no initial charge and a 0.75% annual fee (with any platform fees payable on top), or at existing levels with the potential for built in ‘commissions’ to be rebated in the form of extra units (net result is similar to reduced charges).
The FSA’s original proposals would have prevented funds from building in fund platform costs, instead charging consumers directly if they opt for this route. But they’ve now u-turned so the c0.25% annual cost can continue to be incorporated within fund charges. I find this disappointing and illogical – far better to have ‘clean’ fund pricing and let consumers choose if they want to pay more for extra services like fund platforms.
Coming to your point about who does/is responsible for what. Always assume that fund platform information is the most accurate. If they make mistakes (e.g. they list wrong fund or number of units), which sometimes happens, then there’s likely a problem with your underlying investments which needs to be sorted out.
Some financial advisers/discount brokers plug this information into their own systems rather than simply re-badging the fund platform web pages/paper valuations as their own. While useful for adding extra information or consolidating holdings from several platforms, it gives scope for errors. These are more likely to be a glitch in the adviser’s/broker’s system rather than actual underlying errors, but can be annoying.
In my view if you use an adviser or broker then they should take responsibility for sorting out all errors and glitches, liaising with fund platforms where necessary. While fund platforms appear to do a lot, the tasks are mostly administrative and should, to a large degree, be automated. Fund managers and financial advisers have the greatest scope to provide good or bad value for money depending on what they deliver in return for their potentially hefty fees.
Read this Q and A at http://www.candidmoney.com/questions/question395.aspx
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