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Clean is the new dirty

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Hello and welcome to the first lang cat blog of 2013. At least the first blog on this site, I,ve been doing some posting over on Adviser Lounge, which is worth a visit if you haven,t already.

So the hot issue at the moment, now that RDR is here, is fund rebates and their wily ways. You can read a good article by Sam Macdonald of Money Marketing here on which platforms have added clean share classes and which haven,t.

Those who haven,t quite rightly point out that if they can get an 80bps rebate from ABC Fund Managers Ltd on a 150bps ‘full fat’ share class and pass this to the client, then that client only pays 70bps. With ‘clean’ share classes now coming in routinely at 75bps, that looks OK value, no point in paying an extra 5bps to an already well-padded fund manager if you don’t have to.

Incidentally, when did we decide 75bps was the market anchor figure for an equity fund? I missed that meeting!

As ever, there’s more going on than meets the eye. The providers giving clean share classes the bodyswerve are likely to be those at the more fully priced end of the market, shall we say. The beneficial terms they get for clients allow them to release a little bit of the pressure on their own price within the total cost of ownership. That concept of total cost is going to be HUGE in 2013, along with military shoulders and dresses cut on the bias. I don’t know what any of that means.

Those embracing clean share classes point out that often the additional rebate is just a few basis points and not worth worrying about. Or they are pushing for rebates from the clean share class itself, a bit of a pain as the figures involved are likely to be very small. Would you want to sit working out monthly rebates of 5bps on holdings which are probably no greater than £20k on average? Thought not.

So we’ve got 3 camps. Clean share class deniers, clean rebaters and clean adopters (you can probably come up with better names, me, I’ve got other things to do).

But what’s that coming over the hill? Is it a monster? Yes. Yes it is. It’s the HMRC monster and it’s coming for your rebates. Investment Week amongst others reports that HMRC is minded to tax rebates as income, presumably because they’re too popular already and get invited to too many parties. If this happens, and the smart money says it will, that 5bps advantage, whether derived by rebates from the full fat or clean share classes will be hacked into. In fact, if it goes ahead, that’s the death of full fat classes. You’ll be paying tax on an 80bps rebate in the example above. Or on a 5bps rebate for the clean rebaters. Or none at all for those who just take the clean class at face value.

Exam question, how does an adviser judge which share class to place clients in right now when all this is unclear? This is brutally difficult stuff, quite apart from all the technical and practical ramifications of starting to tax rebates.

Add in the final guidance following on from CP12/12 which the FSA assures me is due in Q1 sometime, we might still see cash rebates banned in favour of silly unit rebates. A 5bps rebate, which has to be taxed and then paid in units, or fractions thereof, anyone? Anyone?

This is one to watch. Clean ain’t necessarily clean. Dirty could be cleaner than clean for a while but then it might be very dirty indeed. All is not as it seems in our wilderness of mirrors. Keep your eyes peeled.

Dirty scores more than clean. It must mean something.
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About Mark Polson

lang cat founder and boss. Expert on all things platforms, pensions and investments. Prolific writer and public speaker, even when people ask him not to be. Knows more about Scandinavian black metal than you, and isn't afraid to prove it.