That the biggest IFA network, Sesame Bankhall Group, has announced that it will become 100 per cent restricted next year is hardly surprising. Under the retail distribution review, the regulatory hurdle was raised to a level that makes independence a risky and expensive option, especially when your sales team is a big bunch of very independent minded, self-employed businessmen and women who take pride in not being told what to do. As the saying goes: “It’s like keeping frogs in a wheelbarrow”.
Towry and St James’s Place are in no way damaged by their restricted status. RDR 2 may further increase the cost of independence by increasing the cost of funds to IFAs, creating competitive disadvantage.
A recent meeting of the Investment Network, a Chatham House rule group of senior people across retail investment, proved to be the most heated in its six-year history. The subject? Fund discounts to replace rebates, which are banned under RDR 2. It is a struggle to understand how people get so excited about such a boring subject, but they do. To be fair, so do I, as it could be the most important development in recent retail investment history. How on earth did we get here?
In the beginning, there were fund supermarkets and wraps. FSMs advertised that they were free, much to the annoyance of the wrap platforms. Their argument had certain merit. The price to the investor of the average fund was 1.5 per cent typically, whether one purchased funds direct, through an adviser or through a fund supermarket.
When pushed, they argued that the charges had been redistributed so that the fund manager received 75bps, the adviser 50bps and the platform 25bps. For some time it was received wisdom that this was the total story. That is what the regulator thought. It was not. The FSMs received additional rebates, typically 6bps to 8bps. This was said to cover administration. In reality, the rebates represented a discount for scale. These discounts were negotiated between the FSMs and the fund groups based on volume.
There is nothing wrong with rewarding economies of scale. It is a shame that it was all so covert. However, we have a shabby history of covert charging in this industry.
To be fair, the wrap platforms played an open and honest game. They persuaded asset managers to give them the 75bps covering distribution and they paid it straight to the customer.
When the regulator looked at platforms in an RDR context, it was unaware of the rebates outside of the annual management charge. Hence the nonsense of three platform papers with no conclusion. The FSMs did not come out of it with huge credit, desperate to defend their bundled model.
So we are about to enter the brave new world free of rebates. Or are we? No, of course not. It is not that simple. FSMs will not receive payments from asset managers; wrap platforms will not be able to give cash back to their customers. So how will FSMs recreate their business model?
In short, they want to continue to benefit from scale. They are the big aggregators that take thousands of small investments from adviser firms, small and large, and lump them together, so the FSM receives inflows in large amounts.
