On the face of it, the abolition of commission-based payments for DIY investment platforms is excellent news for investors.
By forcing platforms - including discount brokers and so-called fund supermarkets - to charge investors directly for their services, the Financial Conduct Authority (FCA) is making it easier for investors to work out who offers the best value.
In effect, it’s insisting on the same transparency from platforms as it demands from financial advisers, for whom commission was banned in the Retail Distribution Review introduced at the end of last year.
Quite right too. The DIY platforms have for too long been seen - and portrayed in the press - as white knights, presenting themselves as “free”, while in fact making considerable profits from inflated annual management charges (AMCs), which most investors wrongly assume they’re paying in full to the fund manager.
But here at Sensible Investing we’re not exactly hanging out the bunting at this latest move by the UK’s industry regulators. And here are the reasons why.
Lack of urgency
If the regulators really are as keen as they say they are to secure a better deal for ordinary investors, why isn’t there more of a sense of urgency? Cash rebates won’t be banned until April 2014, and it won’t be until April 2016 that so-called legacy funds (i.e. investments bought before April 2014) will have to become commission-free.
Some investors may pay twice
A particularly worrying consequence of the delay in implementing these changes, is that until April 2016 some customers may end up paying two sets of charges - i.e. both old-style commission and new-style platform charges, which will either be flat-rate fees or fees based on a percentage of the amount invested.
System still open to abuse
The fact that commission is being phased out doesn’t necessarily mean that fund managers won’t be able to incentivise platforms in other ways to give greater prominence to their funds. Platforms will still be able to receive advertising fees from managers, and this is another potential source of bias. Take the example of Hargreaves Lansdown’s Wealth 150, or Fidelity’s Select List of approved funds. Platforms will no doubt protest that such lists are selected impartially, but it’s very hard for a regulator to prove that fund managers are effectively paying to have their funds included on them.
Potential for confusion
One of the motives behind the changes is a quest for greater simplicity, but they might end up having the opposite effect. One example is the move towards “clean” or commission-free share classes. Some platforms are putting pressure on fund managers to provide cheaper versions of clean funds. For example, a fund may be available on one platform for an on-going charge of 0.75%, but a bigger and more powerful platform might be able to offer the same fund for 0.65%. So, some funds will have versions that are “cleaner” than others, depending on the platform you use. Confused? You will be.
Passive investors will pay more
But our biggest reservation with the new system is that small investors who prefer to invest passively will end up paying more for platform services. Deprived of commission, platforms will look elsewhere to make their profits, and passive funds are an easy target. Under the old system, for example, you would pay just 0.1% in charges for an HSBC retail fund, but the cheapest clean class platform fee is now 0.25%.
Let’s give the regulators some credit. The changes they’re introducing will lead to greater transparency. But it’s going to take far longer than it needs to, and even then, investors will need to stay on their guard to ensure they really do receive the value they’re paying for.