So far, it’s been a good year for investors. New rules brought in by Britain’s investment watchdog, the Financial Conduct Authority (FCA), are making it far easier to work out just how much it’s costing you to invest – and who is taking the money from you.
The old, opaque system of ‘trail commission’ – which meant that part of a fund’s annual management charge (AMC) was passed back to fund supermarkets and brokers to pay for their services – has been thrown out. Instead, we now have new ‘clean’ versions of funds that don’t pay trail commission and have lower AMCs as a result.
Fund supermarkets and brokers instead have to charge explicitly for dealing costs or custody fees, if they want to make money from your fund holdings.
As the cost of investing has become more transparent, investors also seem to be paying more attention to these costs and how they impact on their long-term savings – putting more pressure on the financial industry to cut costs.
That’s good news for investors, and bad news for those who were taking a large cut of the AMC and relying on customers not to realise just how much they were effectively being charged for their services.
From clean to superclean
So, we can agree that clean share classes and explicit charges are a good thing. But what should investors make of the ‘superclean’ share classes, currently being touted by a handful of platforms (‘platform’ is the industry term for an online service through which you can buy funds and shares)?
A superclean fund is one where the platform has negotiated a special deal with the fund manager to offer a version of the fund with an even lower AMC than the ‘clean’ share class. At first glance, it sounds as though this means an even better deal for investors, as supermarkets put pressure on fund managers to offer deals. But there are a number of snags.
First, unlike clean share classes, a fund’s superclean shares class will only be available on one or more favoured platforms. So this means that different platforms will have different deals on different funds.
For example, Platform A may offer a superclean version of fund X, with an AMC of 0.65%, while Platform B only has the standard clean share class with an AMC of 0.75%. However, Platform B may have a 0.6% superclean version of Fund Y, while Platform A has the standard AMC of 0.75%.
This makes it a lot harder to compare platforms – working out the best deal for your portfolio could become a tedious process of checking the AMCs for several different share classes of the same fund for every one of your holdings.
Of course, if you assume that the biggest, most widely-used platforms are generally likely to secure the biggest discounts on superclean share classes (in the same way that a big supermarket can get a better deal from suppliers than a corner shop) that may not be such a major problem. Realistically, investors can probably expect a couple of heavyweight platforms to consistently match or beat their peers.
However, that doesn’t necessarily make it easier to find the cheapest provider. You see, AMCs are only part of the picture. They could easily be outweighed by higher platform costs.
Imagine that Platform C boasts an average 0.21% discount on the superclean classes of the funds it carries, but charges a fee of 0.45% a year. Platform D has no superclean classes, but charges only 0.25% a year. An investor who only holds the discounted superclean funds could potentially be better off with Platform C, but a more typical investor might well have a lower ‘total cost of ownership’ through Platform D. So, being lured in by lower AMCs could leave you paying more overall.
Lastly, investors should bear in mind that the AMC is only part of the cost of investing in a fund. A more relevant measure is the fund’s total expense ratio (TER) or ongoing charge figure (OCF).
These figures include expenses that aren’t included in the AMC, and can often bump up the cost of owning the fund significantly. So, it’s worth being aware that two share classes of the same fund don’t necessarily need to have the same expenses.
The clean class could have an AMC of 0.75% and other expenses of 0.25%, while the superclean fund could have an AMC of 0.65% but other expenses of 0.35%, giving the same TER (1%) in both cases.
At the moment, it’s too early to tell if any of the fund houses offering superclean classes to platforms are going to try padding non-AMC expenses to make up the difference, but if they do, those discounted AMCs could be less of a saving than they look.
Look for the best all-round deal
So, there are plenty of reasons to think that superclean share classes are less ‘super’ than they sound. They make it harder to work out the best deal, they encourage investors to ignore the bigger picture on charges, and they could easily turn out to be a case of giving with one hand and taking with the other.
Overall, they seem more like a ploy to confuse investors, than a genuine saving. It’s probably no coincidence that the platforms that appear keenest on the idea are those with particularly high platform charges.
Given that, we think most investors will be better off ignoring the question of who has the biggest discounts on superclean funds, at least for now (with the market in such a state of flux, it’s impossible to say what the situation might be in a year or so).
Instead, focus on which provider offers a good deal based on your investing pattern (such as how frequently you trade) and assume that AMCs are the same across all providers. That way, you’re more likely to find the best all-round option and avoid being misled by marketing spin.