Almost £184bn of UK investor money is still sitting in retail funds that still pay commissions of some sort to financial advisers, according to an industry report.
Research from Fitz Partners, states that despite efforts by the UK's financial services regulator, The Financial Services Authority, to stamp out potential conflicts of interest or accusations of overcharging, one in four funds are still paying commissions
The UK financial advice market changed with the Retail Distribution Review (RDR) in 2013, that stopped funds from charging commissions, however the research from Fitz Partners shows that many investors are still in legacy fund share classes that continue to apply the charges.
Some 23 per cent of retail assets invested in UK funds are still held in pre-RDR share classes that might pay trail commissions to financial advisers. The study, which is based on Fitz's ‘UK Fund Charges' database does highlight that in comparison, the percentage of these retail assets in 2013 was over 70 per cent and has therefore been steadily declining.
Hugues Gillibert, Fitz Partners CEO, said: "The proportion of retail investors' assets in UK funds invested in fully loaded share classes remains high at 23 per cent. The FCA's ruling facilitating the transfer of investors to clean share classes 18 months ago has had some effect but maybe not as much as expected since it would not allow an easy switch of some retail investors who would have invested sometimes decades ago through an advisor, still being paid trail commission, and to whom they are still legally tied to.
"We expect to see a further decline in assets invested in legacy retail classes in the coming months as our clients are monitoring these share classes as part of their assessment of value".
Since 2013, the legacy retail share classes and the 'clean classes' Ongoing Charge Figure (OCF) have followed a similar downward trend over the last six years. According to the Fitz fee data, the average OCF of legacy retail classes for Equity funds has dropped by 8.8% when OCF for Clean classes and Clean-Wholesale classes intended for the largest distribution platforms have come down by 10.1% and 9.8% respectively. The difference between the legacy retail share classes and clean share classes OCF currently stands on average at 59 basis points (across all asset classes).
"The level of fees for retail classes have come down since the introduction of Clean classes seven years ago but the difference between the retail fees before any potential rebates and the corresponding clean class' stands at 59bps," Gillibert added.
"This 59bps difference remains larger than the platform fees that would have to be paid directly by investors when switching to Clean classes".