Preferential fund pricing in the platform world, otherwise known as ‘superclean’ funds, was under the spotlight recently in a report commissioned by Nucleus and published by financial consultancy ‘the lang cat’.
Cutting through the noise
With a lot of white noise around superclean funds, this timely study, ‘All coming out in the wash: untangling total cost of ownership’, looks at the implications for both adviser and client when choosing these funds.
The report essentially explains why the savings offered by superclean funds (bearing in mind the total cost a client pays for investments, products and financial advice), are negligible, compared with the variable pricing of the other things to consider:
- the platform
- adviser charging
- central investment propositions.
A question of strategy
The concept of superclean funds could be compared with the retail world. Have you ever been in a shop and been tempted by the promise of a bargain? The ‘high-low’ pricing strategy common in retail, where shop owners reduce the price of some items in order to psychologically thrill customers excited to get a ‘deal’.
Consider the hard facts
This ‘high-low’ pricing strategy works because customers assume a great opinion of the shop and are more likely to return to spend more money.
The retailer, of course, is not really offering any real bargains. Some prices might be low but others are adjusted higher to compensate - with the hope that customers will purchase enough of the over-priced items to increase net profits.
Take a look at the real cost
With superclean funds, investors can easily save 7bp on the asset charge in return for paying 26bp more for the platform alone. What’s key though is that the component costs should not be looked at in isolation. Remember that it’s the total cost of ownership that’s important. Advisers need to also take into account time spent working on issues such as compliance that’s complex.
What’s actually much more important than asset charges is the performance of the asset.
To ensure best outcomes for clients (which should of course be the priority for any quality adviser), asset selection is far more important than price - especially among platforms where the platform charge differential can outweigh the asset charge one.
Getting a discount, however small, is always a bonus in the right circumstances but superclean funds should never be chosen for that reason alone.
The moral of the story is that choosing a platform because they offer superclean funds or choosing a selection of funds because of their price, could at best lead to poorer client outcomes.
So choose your funds wisely.
What are your views on the superclean paradox? Leave a comment below.
About the author: Terry Huddart is market insight manager at Nucleus