This time next year independent financial advisers will face the ‘Big One’. The Retail Distribution Review (RDR) comes in to force on 1st January 2013. And it is going to completely shake up the financial advice industry.
Under the RDR, independent financial advisers won’t be able to take commission any more, and they will also have to be better qualified. No longer will the industry be able to skim off commissions from clients that don’t understand what’s going on. In the future, fees will be transparent and clear.
That could lead to a serious collapse in the fees you pay when you invest. It’s already having an impact. Already new funds are coming on-stream that charge a fraction of what they used to. That’s better for all of us, whether you use an IFA or not.
As you know, here at The Right Side we abhor the fees regularly charged by an industry getting fat off savers that don’t know any better. That’s why we’ve always steered clear of most products peddled by the industry.
But now that we head into a new world where investors can see more clearly what they’re being charged, fund managers are desperately bringing fees down. At this rate there may even be some funds that could be of interest to us.
Let’s have a look at the opportunity here…
A new dawn for the fund management industry
Recently I argued that Investment Trusts are likely to be a major beneficiary of the Retail Distribution Review (RDR). Basically, in a world where the client knows and understands the fees they’re being charged, they’re likely to demand lower fees. And that means Investment Trusts (ITs) will be in demand – in fact the regulators have told IFAs to gen up on ITs. So now they’ve got no excuse to ignore them. That should give ITs an extra boost.
Lately I’ve been seeing more and more mainstream fund managers offering Unit Trusts at what looks like pretty reasonable value. I say pretty reasonable because even the knock-down charges of under 1% a year are still nowhere near what’s available in places like the States – but it’s a marked improvement.
What’s on offer?
A new breed of fund manager is getting ready to steal a march on the old brigade before the new regulations come into play in a year’s time. Many are even leaving their posts at the established fund management houses to set up their own low-cost products…
In November 2010 David Norman, the former UK head of Credit Suisse Asset Management, launched TCF Investment (it stands for Treating Customers Fairly) capping his charges at 0.8%.
He reckons: “The fund management industry has forgotten whose money it is looking after. Charges have risen relentlessly over the decades when they should have been falling as funds grew in size.”
He says investors are being overcharged by £12m every working day!
Then there’s Nigel Legge, the former head of Liontrust who branched out to launch Viniculum offering his services at just 0.25% a year! But there’s a catch. He wants 20% of any outperformance over the benchmark.
I’ve got to say, that sounds fair enough to me. When you consider that right now you could be charged upwards of 2% a year for a fund manager who underperforms his benchmark, this is definitely moving in the right direction.
And they’re even launching new types of funds to help keep costs down. Having creamed off £30m in his career at New Star Asset Management, Alan Miller launched SCM (Spencer Churchill Miller). He uses ETFs to give investors a low cost way into the markets.
Of course, we can all use ETFs on our own – without paying any fees other than what the ETF provider charges. I suggested a way of using ETFs to build your portfolio in April last year.
But we’ve got to be careful. A quick word of warning on how these fees are measured…
Low charges can be deceptive
The way the industry measures fund management fees is by using the ‘Total Expense Ratio’ (TER).
But there’s a major flaw. Though the TER includes the annual management charge by the fund manager, it doesn’t include trading costs and performance fees. And they can easily add another 1% a year. So if the fund manager is churning your stocks, or paying himself a nice little bonus, then you could be paying much more than the quoted TER.
Basically, we still need to tread carefully in this industry. But I’m looking forward to seeing what comes our way in 2012. After 20 years of doggedly avoiding the Unit Trust industry, I may finally be able to find some funds with charges that I feel comfortable with.
And IFAs are going to have to pull their socks up. They’ve got one year to put in place an open and clear fee structure where they charge clients a one-off fee for their advice. They’re going to have to prove that they can provide clients with honestly priced funds offering great value.
As an industry, things are going to get tougher – and that’s great news for all of us investors.
Here’s looking forward to new opportunities and prosperity. I’ll keep you right up to date on this exciting story in the months ahead.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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