Last week’s email on the ongoing rebate debate provoked some interesting feedback and we received some good points from Vanguard’s Head of Retail, Peter Robertson, which we share with you below. Thank you to Peter for his contribution.
Being in the minority on an argument is often the result of seeing something different rather than seeing the same things differently. The current rebate debate is a case in point. So what do we see?
• In DP10/2(1) the FSA set as an outcome that: “customers do not suffer detriment from how platforms are remunerated, for example incentives may restrict choice.” The FSA went on to note “Fund supermarkets continue dominating the platforms market and generally administer few non-commission generating products.”
• In contrast FTfm (2) reported on 7th June that: “Passive funds are top with UK pensions” – with survey results showing that low cost investments continue to dominate the pensions market. One of the investment consultants quoted said “We used to ask is there going to be a point where people start moving money back into active, but it doesn’t look likely.”
• That’s an institutional view, what about retail? In the US, where the move to fees is further developed, an in depth study by Morningstar (3) recently showed that in the last 5 years $1.1trn was invested in funds with TERs at least 20% less than the average, whereas in contrast a cumulative $20bn was taken out of all the rest put together. The conclusion Morningstar drew is that, lead by their advisers, retail investors have learnt about fees.
There isn’t a similar survey of UK advisers but it seems logical that fee based advisers utilising wrap platforms use more low cost investments than their rebate-only/commission based counterparts simply because they have greater access to such investments. The difference to the customer is illustrated in the following example:
Suppose a portfolio is created on a fund supermarket at an average charge of 150bps, split 75/50/25 for fund manager/adviser/platform. The same asset allocation could be obtained for around 110bps on a wrap platform with a 25/50/35 split, ie using low cost investments, same adviser charge but with the wrap costing a bit more at around 35bps (not least for the extra functionality).
If fund supermarkets, with their greater scale and simpler offering, made the low cost alternatives available the difference in overall charge to the customer might thus be 40-50bps per annum. While the current situation prevails, driven by the rebate process, this difference is a potential customer detriment, and that’s what we see in the rebate argument.."
Peter Robertson, Head of Retail, Vanguard UK
(The information contained herein does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation is not qualified to do so.)
Notes
FSA DP10/2 Platforms: delivering the RDR and other issues for discussion (sections 3.8 & 3.18 for quotes and supermarket cost of 25bps) http://www.fsa.gov.uk/pubs/discussion/dp10_02.pdf
FT http://www.ft.com/cms/s/0/21281e86-7002-11df-8698-00144feabdc0.html
Morningstar - Investors turn their backs on pricey mutual funds, 13 May 2010 - William Hutchings, www.wealth-bulletin.com http://www.wealth-bulletin.com/portfolio/products-and-strategies/content...
