Unleashing a new breed of value funds

THE Retail Distribution Review (RDR) will help transform the financial services industry. This transformation will give investors the choice, advice and service they deserve at much better value. The overall cost of investing is likely to fall as a result of RDR. Indeed, we have already started to see significant changes in how much it costs to invest in funds. A new generation of low cost, actively managed funds has been launched this year, where investors can get the benefit of active management at a fraction of the price. For example, Schroder UK core only charges 0.4 per cent compared with a typical charge of 1.6 per cent for an actively managed fund. Worryingly, many independent financial advisers (IFA) or brokers don’t offer access to this new breed of low cost fund. This is where RDR comes in.

Speaking plainly, when IFAs and brokers do not receive any commission from fund management groups, it is not in their interests to promote the funds from those providers to their clients. This is the biggest challenge facing the industry and one of the main reasons RDR is being introduced. In not making available certain funds to their clients, brokers and IFAs are not putting their clients interests first, thus raising all kinds of ethical questions. Are brokers only recommending funds for which they receive better commission terms from the fund manager to the long term detriment of their clients?

While RDR will ultimately reduce the cost of investing, it is important that investors do not focus solely on cost efficiencies, as the advice that comes with it can save a small fortune, as well as make one. If costs alone were the answer, then active fund managers would not be needed. The truth is that, depending on the situation, passive investments sometimes work and at other times an active approach does. The US, as the world’s largest stock market, has been a graveyard for poorly performing funds, with 35 out of 48 funds underperforming the S&P 500 over a 10 year period. The effect has cost investors £102.9m in charges alone, without even taking into consideration what may have been lost through poor performance.

At Bestinvest, we separate out our fund rating system and the commercial element of the business, which frees us up to consider which funds are best for clients in which sector. This means we can recommend a low cost tracker fund in the US (HSBC American index R) or the previously mentioned Schroder UK core for large cap UK exposure (this sector still benefits from active management, particularly when the costs are driven so low), or an active managed fund for areas such as smaller companies or emerging markets.

RDR will also lead to improvements with charges on products as well. Few people pay for their Isa wrapper, and we are now seeing similar developments in the Sipp space. Many providers offer their Sipps free of charges, but many still take full ongoing commission from the investments. Once again, the solution is the same: a combination of low cost and good advice to provide investors with the best value product on offer. This year we launched the “Best Sipp” in a move to drive down costs for investors, while offering independent research, portfolio models and a unique rating system. This is important for the industry and in relation to RDR, where the focus is on transparency of costs. However, some advisers and brokers are concentrating on offering the cheapest products in the industry, while others focus on marketing the latest new product or fad. The Bestinvest view is that there is a real alternative, providing guidance, research and the tools for investors to make the right decisions based on their particular set of circumstances, but at the right cost. We shouldn’t get caught up and focus solely on charges. Instead we need to look at the bigger picture and provide the best value service to clients.

Adrian Lowcock is senior investment adviser at Bestinvest.


RDR’s aims
● Consumers are offered a transparent and fair charging system for the advice they receive

● Consumers are clear about the service they receive

● Consumers receive advice from highly respected professionals

New rules will require:
● Advisory firms to explicitly disclose and separately charge clients for their services

● Advisory firms to clearly describe their services as either independent or restricted

● Individual advisers to adhere to consistent professional standards, including a code of ethics