Investment platforms will not be able to receive rebates from investment managers if the proposals contained in the Retail Distribution Review (RDR) discussion document are implemented.
Investment platforms offer you access to a number of unit trusts, shares and exchange traded funds, the ability to switch easily between these products, and a consolidated statement.
The RDR discussion document released by the Financial Services Board yesterday proposes that the only remuneration that investment platforms, or linked-investment services providers, should receive is platform administration fees, which must be disclosed and agreed to by you, the investor. If this proposal is implemented, investment platform providers will no longer be able to accept payments from product suppliers in return for providing bulked investments collected from numerous investors who use the platform. Instead, platforms will have to use “clean prices”, the RDR document proposes.
When investment platforms were first established, they received rebates from investment managers to list these companies’ funds on their platforms, but they failed to disclose the rebates to investors. After the practice of paying rebates was exposed, some platforms passed these rebates on to investors.
However, many platforms use the rebates to reduce the platform fee that you, the investor, pay, instead of offering a cheaper management fee on the funds on the platform. The problem with this is that you cannot see how the discount is applied.
If platforms charge “clean prices”, the funds are available at the cheaper fees that apply to funds that take in large investments, and the platform fee is not discounted. This makes the fees more transparent, because you can see what you are paying for at each link in the investment chain.
The RDR document says rebates present risks of “conflicts of interest, complexity of charging structures and, ultimately, a reduction in effective competition, to the detriment of consumers”.
The document says that investment platforms will be prevented from featuring specific funds more prominently than others on the platform menu. This proposal could pose problems for platforms that, within their range of funds, offer a “core portfolio” with lower fees that has been subjected to a due diligence by the platform provider.