This meant that fund houses were no longer able to kick back a portion of their fund charges to advisers for their decision to use a particular fund.
In theory this was a positive move, meant to encourage advisers to put their clients in funds that were better suited to their objectives and risk tolerance rather than the amount of cash that went back in their pocket.
Asset managers across the board have rolled out "clean fee" share classes, which are intended to strip out the ongoing charges figure of everything bar what directly relates to the cost of running the fund.
So instead of the typical 1.5 per cent annual management charge (AMC) investors were used to seeing ahead of RDR, on average they pay just 0.75 per cent.
However, the unbundled clean fees leave out the annual charges of holdings on platforms such as Hargreaves Lansdown or Cofunds, which are typically 0.25 per cent and any annual trail commission of 0.5 per cent on existing investments.
On top of this general confusion about what you are actually paying in the end, the tax man waded in and said fund rebates – which are now passed back to the client – on investments that are not protected by a pension or ISA wrapper are fair game for HMRC, leaving many investors better off in the old dirty share classes anyway.
In the ever-changing game of fees, there are currently three main types of share class available to retail investors – bundled, unbundled clean and the new super clean.
The old unbundled share class carries a typical AMC of 1.5 per cent for the majority of equity funds, which includes the fees paid to the asset management firm, the platform rebate and any adviser commission.
Clean share classes dropped this annual management charge to 0.75 per cent on average, but before you go thinking that figure automatically makes the fund cheaper, keep in mind this does not mean it is free of the old rebates, it just accounts for the removal of the platform fee and rebate.
To add another layer of confusion, super clean share classes are those with an even lower AMC than a clean one.
Super clean share classes are intended to consolidate the financial services industry around charges of roughly 0.65 per cent; however, Hargreaves Lansdown claims this level will only lead to a "new normal" and that this level is in fact more expensive than some of its current agreements with fund groups.
According to Skandia’s Phil Oxenham, the term "clean" can be very misleading for investors because some providers have negotiated rebates on bundled funds greater than half the AMC, which brings the net cost below that of clean funds.
"The anticipation with super clean funds is that this same net cost is reflected in the pricing of a super clean share class without the need for any rebates," he said.
Gavin Haynes, managing director at Whitechurch Securities, said fund distributors such as Cofunds, Skandia and Hargreaves Lansdown have all been trying to negotiate these super clean share classes with fund providers.
Haynes (pictured) says that while the fee itself is lower than in the past, once the additional costs are factored in there is little difference for the end investor.
"You can get fees closer to 0.65 per cent but that is just the fund fee. Then you obviously have to pay platform charges. Then if you take advice you’ll have the adviser fee on top of that," he said. "Super clean fees are only one component of the total cost."
However, he says super clean shares do circumvent the backlash from taxes because there is no rebate.
"Super-clean share prices do go around [the tax issue] a bit because there’s no rebate. You’re just paying a lower cost initially," he said.
How about bypassing the platform and investing in the super clean share class yourself? Unfortunately this won’t work either; if, like me, you are drip-feeding a comparative pittance into your pension or ISA portfolio, you will be shunned from these shiny new super clean share classes, as they are designed for distributors who place significant amounts of assets into a group’s funds.
This begs the question of why the share classes are needed in the first place, as a discretionary or wealth manager who is putting millions into a fund would likely be able to negotiate their own rate anyway.
In the end, it seems super clean share classes are much hyped but change very little, and the fallout for investors accessing funds on platforms remains to be seen.
For now, there’s nothing more for investors to do but wait and see.
If you have any questions regarding clean share classes, leave a comment below or email us at editorial@financialexpress.net
