The long awaited FCA Paper on cash rebates came out last week. In reality nothing has really changed although I will be first to admit I need to read the detail. But the key message is that cash rebates from fund managers have gone.
I have long been agnostic on this, I understand arguments from both camps however where I take issue is what I call hidden payments. This is nothing underhand but it is a way of concealing what you (the provider) are receiving for your service.
Over the last ten years a vast majority of financial planners have moved to a fee based structure service, whether this is through an hourly rate, a fixed percentage, a retainer fee or a combination of fee structures. Financial planners have also had to articulate their service proposition, in a recent blog I expanded on this to explain that what is perceived as service (i.e. investment performance) is only a part of the overall service proposition.
And this is the rub we have a part of the industry where they have moved to a clean structure and what happened on the 1 January made little difference to them. The reason why I am agnostic on the rebates is that in many cases the rebates from fund managers came back to the client and sat in their cash account, the client could then choose whether to use this to pay the fee or invest the money which I think is fair. Now they don’t have that choice, whether that is right or wrong cannot be argued now.
The other part of the market is the direct market and I believe they have a bigger challenge. Let me explain why, when you go direct the key reason has always been about cost and the ability to deliver something that is better than what a financial planner can deliver. There is an additional argument now about not being able to get advice but I want to park that for the time being.
Many of these platforms have argued that they offer a “free service”, the reason for this is that their profit is driven from the rebates they get from fund managers. The service you get for free is often tips on investments and in reality most investors pick these investments without little thought. Two things are about to happen, firstly these companies are going to have state a fee for their service, and eventually I think over the next two years the legacy products will have rebates stopped.
Now those that have prided themselves on a free service face a challenge. I have two investment platforms I use. One charges me £20 a quarter plus trading charges but fully rebates any fund manager rebates. For that I get access to a platform where I can trade. I get no other service other than access to information on their website which includes blogs etc. On the other side I pay no fee but I know the platform receives rebates from the fund managers. The platform is no different to the one that I pay £20 a quarter but I get lots of marketing information (which I have to say ends up in the bin).
Now on the second one I know their average investment is around £40,000 so assuming on average they get around 0.75% on rebates this means they are getting £300 a year. This is around £25 per month. Now with the changes coming in this has to stop. My simple maths shows that somehow they have to make this money to keep the business model alive, and this is my problem when I go direct I don’t see the value in their service because I get an equally good service for £20 a quarter. If they come in at this level then fine but £75 a quarter then I would look to go elsewhere.
My point is this financial planners have had to adapt over the last ten years to a clean structure, and a clear service proposition. Direct propositions have not, they now have a very short period of time to adopt this and articulate their service proposition in such way that someone sees value in this.
Now if we take the argument that most direct investors are sophisticated then it won’t take long for people to think I can get this fund for 0.75% and pay £20 a quarter for the platform. Why would I pay any more?
The value of share and fund information I would argue is old news, in this modern age we can simple go online and identify performance information, and then drill down into the fund and this is what sophisticated investors will do they don’t need marketing information to tell them something that they already know.
Let me take a couple of examples, when I look at shares I tend to consider the business i.e. are they market dominate so for example could someone easily replicate there business model, I then look at cash flow and finally I ask if the share is a fair price. There is one direct proposition where I would argue that they tick all the boxes but the share price is high. Now I could consider that on the upward curve it still has some way to go but if I consider the cash flow is driven by rebates which are going I would start to be concerned. It is like knowing the party is coming to an end but you just don’t when and therefore you have to make the decision do you leave the party early or stay to the end?
I apply the same thought process to funds, for example on a macro level Japan is a very interesting place to be. This could be a final roll of the dice but actually when you drill down you find you have the first dominate party in the lower house and potentially the upper house. You then have the debate around the Yen. Once you know all of this you can then consider how you can best benefit from this opportunity.
My point with these two examples is that if I was supplied with this level of detail then I would be happy to pay a premium for the service but in reality I haven’t seen any direct proposition that delivers this.
So we come to it all being about the money, direct propositions are going to have to change their price models (if they have not already done so) and they are going to have consider whether the service they offer and perceive to be of value is of true value to the end customer. Only the customer can decide that.