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June 10, 2011 7:15 pm

Platforms urged to be more open on fees

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Individuals are investing record sums via fund platforms – the online transaction and administration services that are available to financial advisers as well as to the public. But consumer groups and some providers believe platforms need to be more open about the payments they receive for selling funds, and more willing to sell funds that do not provide them with fees.

Figures released this week by the Investment Management Association showed that, in April, platforms handled £1.3bn-worth of gross fund sales to holders of individual savings accounts (Isas) – the highest Isa fund volumes on record. In total, sales of all types of funds rose to £3.6bn, taking platforms’ share of the market to 42 per cent.

Platforms have gained in popularity by providing a one-stop shop for fund investors and advisers. The Financial Services Authority (FSA) said last November: “Platforms provide consumers with a consolidated view of their investments, a venue through which to invest in funds . . . Some may also provide services that help advisers administer their clients’ investments.”

However, the regulator also proposed that platforms must be “upfront about the income they receive from fund managers [to] make it easier for advisers and consumers to compare different types of platform”. Earlier this year, the Financial Services Consumer Panel (FSCP) warned that the way platforms are currently paid is potentially “detrimental” to investors.

In most cases, platforms make no explicit charge for facilitating fund investments. Instead, the investor pays the fund’s annual management charge, typically 1.5 per cent – and 0.25-0.45 per cent of this is rebated to the platform for making the sale, with another 0.5 per cent going in adviser commission, and the balance of 0.55-0.75 per cent kept by the fund manager.

According to the FSCP, this rebate system can potentially lead to bias, as “different levels of rebate for different funds make it more attractive to promote some funds over another”.

But an FT Money poll of the four largest platform providers – Cofunds, Skandia, Fidelity and Hargreaves Lansdown – has found they are still not immediately “upfront” about how much they are paid to promote and sell funds. They generally only disclose the percentage range of the payments they could receive and will only provide a precise figure on request.

“With the terms and conditions of the platform, we clearly state the range of basis points we may receive from a fund manager,” says Verona Smith, head of proposition at Cofunds. “If investors would like the exact rates for funds they are investing in, we will provide this.” A stated range “could be quite broad”, admits Gary Shaughnessy, UK managing director of Fidelity.

Skandia will tell investors on request how much of any fund’s annual charge it receives. Hargreaves Lans-down will also provide precise figures to any client who asks, but argues that the payments it receives from fund managers do not affect what it sells. “We accept that part of what we receive is for providing a general shop window,” says chief executive Ian Gorham. “However, we never accept money to promote a fund or promote one over another because of what we receive. Any investor or conspiracy theorist who believed that would be barking up the wrong tree.”

Even so, some in the industry believe the lack of clarity over platform rebates must be addressed.

Martin Bamford of advice firm Informed Choice says the FSA should require all platforms to disclose the constituent parts of their charges. But Dan Farrow of Sbn Financial fears that low-cost passive tracker funds will be “shunned” as their charges are too low to provide “kickbacks” to advisers and platforms.

Fidelity says it favours openness – and is looking into its policy. “We should end up in a position where the platform fee is clear and disclosed so, whether you are buying via an adviser or execution-only, you can see [it],” says Shaughnessy.

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