As annual fund charge rebates become more common, so does the confusion they cause. Read on to find out all you need to know to be confident of getting a good deal..
One topic that seems to cause more than its fair share of confusion is annual fund charge rebates, especially when buying via fund platforms/supermarkets/wraps (or whatever else you want to call them) and discount brokers. Fortunately it's quite straightforward once you understand what's going on, so here's the rundown:
What's in an annual charge?
A typical 1.5% annual fund charge breaks down as follows:
- 0.5% - paid as a 'trail' sales commission to financial advisers.
- c0.25% - paid as a fee to the fund platform on which the fund is held.
- c0.75% - revenue pocketed by the fund provider.
Whereas trail commission is fairly standardised at 0.5%, the c0.25% paid to fund platforms is harder to determine - primarily because the amount doesn't have to be disclosed to customers. I wouldn't be surprised if some platforms take more than this, particularly on bigger selling funds that are promoted via 'recommended' or 'best buy' lists. While this isn't really your problem , it comes out of the fund provider's margin, it does potentially give reason to take such lists with a pinch of salt (is a fund included on merit or because it's more profitable for the platform?).
How do fund rebates work?
There are two sources of potential rebate: trail commission and the platform fee.
Trail commission rebates (either partial or full) are given by some discount brokers - FSA regulated companies that don't give advice, but simply transact investments and collect commissions. These rebates are usually paid to your bank account or the cash account on the platform you're using.
Platform fee rebates are given by a few platforms who instead charge an explicit fee to customers for their services - i.e. they rebate the fee received from fund providers (to your cash account) and charge you a fee instead. What matters is whether the fee you're charged is higher than the rebated platform fee.
In some cases (e.g. via the Nucleus and Aviva platforms) it's possible to buy 'institutional' versions of funds which don't pay commissions or platform fees, so a fund normally costing 1.5% a year will instead cost around 0.75%, although you'll expect to pay a platform fee in addition.
What about discount brokers who operate their own platform?
Discount brokers like Hargreaves Lansdown, Alliance Trust and Bestinvest who operate their own platforms ('Vantage', 'i.nvest' and 'Select' respectively) collect both the trail commission and platform fee, meaning they're often paid half or more of a fund's annual management charge. Obviously they have to foot the bill for running a platform, but it does potentially increase their overall profits and/or ability to offer rebates to customers.
Focus on the bottom line
There are quite a few permutations of the above, buying funds direct from platforms, on platforms but via discount brokers or advisers and from platforms operated by discount brokers.
This means rebates can vary from zilch to around half the annual management charge, but the key is to look at the bottom line, i.e. what you'll end up paying after all rebates and extra charges. I've taken a look at a selection of options below to see how they stack up.
The figures show typical rebates for a fund charging 1.5% a year (held within an ISA) and include estimates of the amount you'd save on a £50,000 investment over 10 years compared to the standard 1.5% charge (assuming 7% annual growth before charges) and the net amount (margin) pocketed by the provider after rebates and fees. I've assumed fund rebates simply offset the annual charge - not strictly true if it's rebated as cash, but fine for comparison.
Platform purchased direct
| Provider | Fidelity Fundsnetwork |
|---|---|
| Annual rebate | Nil |
| Other annual fees | Nil |
| Your net annual cost | 1.5% |
| Potential 10 year saving | Nil |
| Provider's estimated annual margin | 0.75% |
Buy direct from Fundsnetwork and they'll be laughing all the way to the bank!
Platform purchased via discount broker
| Provider | Cavendish Online (using Cofunds) | Clubfinance (using Skandia) | Fairinvest (using Nucleus) |
|---|---|---|---|
| Annual rebate | 0.5% | 0.375% | 0.75% |
| Other annual fees | £25 one-off charge | £68.50 Skandia charge | Fairinvest 0.5% |
| Your net annual cost | 1% plus one-off £25 | 1.125% plus £68.50 | 1.6% |
| Potential 10 year saving | £4,090 | £2,134 | -£806 |
| Provider's estimated annual margin | Cavendish Online £25 (one-off) | Cofunds 0.25% Clubfinance 0.125% | Fairinvest 0.5% Nucleus 0.35% |
Cavendish Online's one-off £25 revenue is so small I can't see them becoming rich from selling ISAs, still, it means a great deal for customers. Clubfinance keeps a quarter of annual commission, but is still reasonable value despite Skandia's charges. Although Fairinvest offers the highest annual fund rebate, charges actually end up higher than normal after they and Nucleus have taken their fees.
Platform purchased via financial adviser (assumes 0.5% trail commission paid to adviser)
| Provider | Aviva Wrap | Standard Life Wrap |
|---|---|---|
| Annual rebate | 0.75% | 0.5% |
| Other annual fees | 0.25% Aviva charge 0.5% financial adviser | 0.5% financial adviser |
| Your net annual cost | 1.5% | 1.5% |
| Potential 10 year saving | Nil | Nil |
| Provider's estimated annual margin | 0.25% | 0.25% |
Aviva offers institutional fund pricing, but net costs return to the usual 1.5% after their platform charge and trail commission have been paid. Standard Life does thing slightly differently, but with the same end result.
Platform operated by discount broker
| Provider | Alliance Trust Savings i.nvest | Bestinvest Select | Hargreaves Lansdown Vantage |
|---|---|---|---|
| Annual rebate | 0.5% | 0.25% (only on £50,000+) | 0.25% |
| Other annual fees | £30 ISA fee | Nil | Nil |
| Your net annual cost | 1% a year plus £30 | 1.25% | 1.25% |
| Potential 10 year saving | £3,716 | £2,046 | £2,046 |
| Provider's estimated annual margin | 0.25% plus £30 | 0.5% (0.75% below £50,000) | 0.5% |
Alliance Trust Savings leads the pack by rebating all trail commission, although partially offset by their annual ISA fee. Bestinvest and Hargreaves Lansdown look a bit stingy by comparison, typically rebating half the trail commission, which leaves them raking in around 0.5% or more a year - a lot more than the cheapest discount brokers (even after the cost of running a platform).
Conclusion
Fund rebates are a good thing - they can save you lots of money. But while some providers claim to be giving you a great deal, they end up pocketing far more for themselves than they rebate to you. Always look at your actual cost net of any other charges, as this can vary widely (see examples above).
Read this article at http://www.candidmoney.com/articles/article233.aspx
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