Good reads from around the Web.

The Financial Times has a weekly podcast, The FT Money Show, which is usually well worth a listen. This week’s is notable for two reasons.

Firstly, the host James Pickford is considerably scarier sounding than the usual host, Jonathan Eley.

Don’t worry – he can’t hurt you via the Internet.

Secondly, his guest Alan Miller of manager SCM Private had some interesting words on how the RDR changes to bring in transparency on charging have not really worked out.

Miller’s comments follow findings by the Financial Conduct Authority this week that most financial service providers are still not being clear about charges. (No surprise to anyone who has tried to find the cheapest online broker).

As The Guardian reported:

The FCA found 73% of firms had failed to provide the required information on the cost of advice.

For example, 58% failed to give customers clear, upfront general information on how much their advice might cost, while more than a third either failed to provide a clear explanation of the service they offer in return for an ongoing fee, or failed to properly outline the customer’s cancellation rights.

In his response, Miller comments that:

“The problem is that even if [the firms] have followed the rules, they need to add up not just their costs in a transparent and understandable way, but also all the other costs.

So even if they were following the FCA rules, it would still be meaningless to the consumer, because the consumer has to add their cost to all the other layers of cost to have a proper understanding of how much their paying from beginning to end. […]

The whole industry has been allowed by the regulator to put in totally misleading adverts that focus on the annual management charge, so the consumer thinks that’s the fee.

So whereas it used to be a 1.5% annual management fee, [it’s now] 0.75%. The consumer thinks ‘that’s brilliant, I’ve saved half the fee’.

But it turns out they haven’t saved half the fee. In fact we’ve worked out the total cost has actually gone up by nearly a third.”

Miller lists all the various fees and charges that are very familiar to dedicated Monevator readers.

He believes RDR has simply increased the confusion:

“Typically 70-80% of the British public want to have it in one number. The FSA thought that transparency meant having lots of different numbers. But actually that’s jut confused things even more.

So the so-called transparency – which we’ve now found out that people don’t even follow anyway – is about as opaque as you can get. […]

We have wealth managers who have privately said to us they don’t understand the charges, so what hope have the clients got?”

His solution is that there should be further “revolution”, to give consumers one number, adding up all the layers, and delivered “in pounds and pence.”

Miller says such new rules are coming from Europe and will be in force in the UK by 2017. That’s the first I’ve heard of this, so I’d be interested to hear from anyone who knows more.

Test their transparency

Miller is a co-founder of the True and Fair Campaign, which calls for more transparency and simpler fee structures.

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The following is another guest post from our industry expert who prefers to remain anonymous in sharing these insider tips with us. While we’ll always want to hunt down the cheapest funds and the most cost-effective platforms, I think it’s worth us understanding all of the realities of the investing business.

Everybody hates platforms. What might surprise you is that fund managers hate platforms every bit as much as you do.

While private investors jibe at the costs, the annoying extra charges, and those exit fees, what bugs the fund managers is the difficulty and cost of actually getting on the damn things.

Like most businesses, platforms exist to make a profit for their shareholders.

Except that they don’t.

When the FSA, as it was then, commissioned a leading firm of accountants to analyse the industry in 2012 ahead of RDR, it revealed that only one of them made any money. (But that one did make a lot.)

So why do the others platforms do it?

A business on the margins

Initially many platforms began life simply as a way for fund managers to market their products and make lives easier for IFAs.

They started as a one-stop shop where IFAs could put all their clients’ investments in one place and just get one statement.

Pretty soon though, fund managers realised they could encourage intermediaries to sell more of their funds if they provided some encouragement, known as trail commission.

But now the FCA ¹ has decided the industry should be transparent about everything, and that has made life a lot more difficult. Even worse, this is happening just when low cost passive funds that don’t pay trail are getting more popular – and fewer people are saving anyway.

Because most platforms lose money, they don’t really want to do anything that might make them lose more, such as stocking a never-ending range of funds. So it is a battle to get a fund onto some platforms and may even involve the payment of a so-called shelf fee just to be included.

Others just point-blank refuse to host a fund they don’t think won’t sell.

Before committing to a platform it is therefore a good idea to see exactly how many funds they stock. It doesn’t help investors much if fund managers create low cost funds but they are not available on the platform of your choice.

Since investing is a game for the long term you want to be fairly confident that the platform will be around for the next few decades.

That is not easy to assess. Nevertheless it is more likely that the profitable ones will survive.

Those that are tagged onto fund management operations as a distribution mechanism might suffer the cost-cutters knife in a few years. If so, this could force investors to move funds and possibly incur costs such as exit fees or maybe even tax. At the very least it involves more paperwork – the very thing platforms were invented to minimise.

Behind the best buy list

Platforms are just there to facilitate investing and keep the process as simple as possible. They most certainly do not provide advice to the investor using them for execution-only.

That might sound odd though to people who see the list of recommended funds that so many promote, whatever they happen to be labelled.

Getting onto these lists is the Holy Grail for fund managers.

Once upon a time such a list might have been compiled through the sage judgement of a seasoned market analyst. However, fund managers soon realised that inclusion in such a list was well worth a good lunch, a game of golf, or maybe just an enhanced trail fee.

Quite why such a distortion of the word recommended – or whatever other euphemism is used – has been allowed to persist for so long by the FCA and its predecessor is a mystery.

Well, no it isn’t actually.

While it is true that some cheap funds are now included in such panels, most of the incumbents are heavily promoted, well known and, usually, the largest funds in such compilations.

After all, why should the platform or broker take a risk on its reputation when it can get an easy life by sticking with the big guns?

Those of an older generation may remember the aphorism; you never get fired for buying IBM – a phrase that emerged in the hey-day of big computing when no one was quite sure what was going on. Buying the market leader was a safe, career-enhancing move.

No platform is going to risk its reputation promoting new funds, especially if they are small and do not spend much on promotion.

Consumers might think that in the new post-RDR investor-friendly world that marketing budgets are less important.

Think again.

The new rules allow managers to assist platforms with marketing costs, such as mail shots. Who could resist the opportunity of getting someone else to pay for the postage and other costs of reminding all your clients that you exist and are ready to help?

If platforms didn’t exist, someone would have to invent them

Perhaps the worst aspect of platforms for fund managers is that they have no idea who their clients are. All they get is a figure for money in or out.

Not knowing exactly who your customers are is major handicap for any business. For one like finance that relies so much on trust, it is a near-fatal flaw and makes it even more impersonal.

But the unfortunate truth is that maintaining all those records, dealing with money laundering checks, sending out reports and dividends is time-consuming and expensive. Fund managers want to manage money, they don’t want to run databases and satisfy the FCA on dozens of different issues.

For all that stuff platforms fill a valuable role. We might not like them, but no one is keen of taking on the tasks they do and certainly not at the prices they charge.

See our table to choose between the different fund platforms.

1. Financial Conduct Authority[↩]

Good reads from around the Web.

You have until midnight tonight (5 April) to shovel any free cash into your ISA to make the most of your 2013/2014 allowance.

If you’re still reading then either you have already filled your ISA – well done – or you haven’t got enough spare cash.

Or you’re a silly billy. Because there is no advantage to holding any cash or investments outside of an ISA. Nada. Zip.

The Guardian has a summary of some of the best places to stash your cash, though I can’t say whether you’ll be able to get money into every one of them in the scant hours remaining. Some firms are faster than others.

Alternatively, if you’ve got a share ISA already open, double check to see if you’ve already filled it to the max this year.

Me, I load up my shares ISA within the first few days of every new tax year. Why waste a moment of potential tax-free compounding?

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