Clive Waller tackles platform charging

Clive Waller, managing director of CWC Research, discusses the contentious issue of platform charging.

The issue of how platforms are remunerated has suddenly become the issue of the day. I recently chaired a conference of industry leaders where discussion was not only heated and animated, but stopped the speaker completing his agenda.

So why is the issue so contentious? Like all good arguments, there are legitimate reasons for taking either side. However, my concern is that the regulator is seen to be consistent and true to the original RDR objectives.

On the one hand, it is argued transparency is the only legitimate way forward. Adviser charging must be transparent, so the remuneration of the platform must also be transparent. After all, one of the objectives of the FSA’s the RDR stated in DP07/01 was: “Information for consumers is clear, simple and understandable.”

The counter argument is the platforms that trade very large amounts of a fund are worth a better deal than those that move little. What has it got to do with the customers what the fund pays the platform?

There are good arguments for the bundling of charges, although not everyone will agree. Not all customers are interested in knowing every penny of charges in detail.

Some years ago, the regulator asked my firm to look at complaints about platforms. There were few; most were as a result of too much data. Investors using platforms that show every transaction charge and who regularly trade will get a long list of charges. For some, that is acceptable, but others would rather just see a total, paying one agreed charge that covers all transactions.

Full transparency is important for some people but not all. However, where the argument for transparency does have weight is when it comes to the total cost to the investor.

Charging for funds is not as clean as it might be. The quoted charge is the AMC. However, the AMC is not the total charge; there is then the total expense ratio, which includes certain expenses. So is this the total charge? Um, actually it is not! Oddly, dealing charges are not included.

Former New Star active manager Alan Miller argues that a fund charging an AMC of 1.5% might in reality cost the client nearer to 3%. The IMA argues that dealing costs are charged to the fund, not the client. I do wonder who pays the fund’s costs. The problem with such smoke and mirrors stuff is that the investor doesn’t know how much of his money is going on charges and how much is invested.

If I buy a share through Selftrade, I know exactly what I have invested. I also know exactly what it has cost me to do so. Perhaps I am living in dreamland, but I do not understand why it should be different with funds.

Therein lies  the debate over whether fund managers should offer more attractive terms to bigger distributors. It is argued that in a competitive market, a distributor that moves more of a product should receive better terms.

Thus, Tesco may offer McVities biscuits at a lower price than the corner shop and make a bigger profit. It should therefore be the same with funds. The comparison works only if it is quite clear to the customers how much is invested.

The customer can count the biscuits. If the bigger distributor gets a better deal, it must be passed onto the client, otherwise there is a conflict of interest.

Bundling is not the issue. I want to be able to count the biscuits.