The Retail Distribution Review (RDR) in the UK will have an impact not just on financial adviser commissions, but also on the back office costs associated with investing in funds, Ian Taylor, chief executive officer at Calastone, the mutual fund technology provider for mutual fund transactions, told Global Custodian.
The UK Financial Services Authoritys (FSA) rules were introduced to ensure retail investors are better informed about investment products, particularly where financial adviser commissions are attached. From Dec. 31 2012, commissions on product sales will be prohibited and, instead charges for the advice provided to the client by the advisor must be agreed and paid for by the client. This means a client can opt to pay for the advice independently of the product or from the product itself, radically affecting fund managers.
Calastone, which was set up in March 2007 to produce fund ordering, payment and settlement technology to the investment funds industry in proprietary formats went live with its first three clients in May 2008 and today services 111 distribution platforms and 200 fund providers via their 25 third party administrators. The company is present in Luxembourg, London, Hong Kong, Taiwan and Sydney and expects to have an office in Singapore by the end of the year.
The RDR will be a key driver of Calastone’s business as the review prompts greater transparency in the UK investment space so that fund investors will know exactly what they are paying for.
A Northern Trust survey of 30 fund managers found that 74% of them have considered the impact of the RDR and are actively working on adapting their business accordingly. However, these fund managers see a diverse number of challenges affecting the implementation of the RDR.
Karen Hamilton, head of fund administration product development (EMEA), at Northern Trust, said the regulation will affect any fund distributed in the UK to retail investors, with managers needing to consider their distribution channels, asses changes and determine what services they want to offer to IFAs and investors. “Fund promoters will, as a result, need to assess the impact to their distribution chain, as well as any required technology enhancements and potential changes to their distribution strategy and fund range,” she said.
Fund transaction and order processing will also become more important in the context of the RDR as the review begins to reshape the industry, says Taylor. This is a central theme, which is being pushed by the FSA in order to create high levels of transparency. The regulation will do away with the cash rebates linked to the annual management charge from fund managers (and fund manager-to-platform payments). Post 2013 those rebates will not be allowed, subject to final confirmation by the FSA at the end of this year. So the client has to pay for them (advisor and platform services) directly. This will change the dynamic around platforms in terms of fund managers and IFAs and how the end investor pays for these services.
“Traditionally, where an investment fee might be 150bps, 75bps typically would be retained by the fund provider, 25bps might go towards the fund platform and 50bps passed to the IFA. Under the new regime the annual management charge cannot be used to provide cash rebates to platforms and IFAs to pay for their services on behalf of the client. Because the client will have to pay directly for these services, the increased transparency surrounding costs may lead increased assessments of service value.”
While the annual management charge relates to the direct cost of the fund, Taylor says that equally important are the costs related to fund trading, custody, auditors fee, etc., which will ultimately define the total cost of ownership of a fund and its performance.
According to a study by UK insurer and pensions provider Royal & Sun Alliance, 40% of the cost of pension provision in the UK disappears through fees not associated with the annual management charge.
“The RDR is likely to be a catalyst for end consumers to assess the total expense ratio of a fund and not just the way in which payments to IFAs and fund platforms are made,” says Taylor. “Whilst greater transparency was coming, the RDR has almost certainly accelerated the process.”
While Taylor says it will be difficult to predict the opportunity in messaging over the next 12 months, further clarity will arise as the detailed impact of the RDR plays out.
Calastone has already seen some of those costs impacts among its clients, with an increasing number of fund providers and IFAs opting to automate their processes. Indeed, this may well be evidenced by the providers volume and revenue growth of 6.3% compound per month over the last few months.
(JDC)