Buying low and selling higher is the basis of all commerce. Intelligent purchasers seek to cut out intermediaries to buy direct.
Smart intermediaries use their financial muscle to bulk-purchase, getting a better price than a single purchaser can agree on his or her own. They then can add value out of the spread between the price they pay and the price passed on to the customers.
Smart customers want to know the size of this spread so they can work out if there is value for money or whether another intermediary can be approached or even if there is scope to negotiate a “go direct” deal – if the intermediary is not adding extra value.
These general principles of trading apply whether you are trading yak butter in Tibet or fund management in London. The yak butter trader will argue that the physical process of getting the butter from A to B is tiring, smelly and time consuming, he is paid for the very tangible benefit of not having to do this yourself,
With funds things aren’t quite so physical. If all that a fund platform does is negotiate one share class at xbps and convert to another at x+20bps, any purchaser has to ask what the extra bps (1bp = 0.01%) are for (it being neither tiring or smelly or time consuming to re-sell a fund).
For it is on this simple buy/sell algorithm that the entire fund platform industry works.
Retail fund platforms
Fund platforms are the new intermediaries. Since the RDR, organisations like Hargreaves Lansdowne have grown rich and been rivalled by platforms such as Ascentric, Nucleus , co-funds and the Fidelity funds platform. All are making good money from doing the funds equivalent of the Tibetan Yak butter trader.
Workplace Pension fund platforms
This is also happening with insurers offering services to workplace pensions. Zurich , Standard, L&G, Aviva and others make their money by buying funds cheaply and selling them at their own price (the AMC).
Whether the spread is fair is not something that Joe Public either wants to or is capable of determining. To make this determination you need to know the fair price and that’s a matter of knowing the market. Unless the market is open, the price is whatever a fund manager and a platform manager can get away with.
Unless we have open pricing, we cannot have fair pricing and we cannot put the independent entities who act as our fiduciaries in charge.
I put it this way because workplace pensions will from April 2015 be governed by independent entities which are charged with getting a fair deal for the members. Whether these are master trusts of Independent Governance Committees, the job of these bodies is to be impartial and ensure that all parties in these trades get a fair deal.
This of course presupposes we trust our trustees! To do so, we need to know they are impartial and effective
Impartial and effective
There can only be one way that we can be sure that these bodies are effective, that is trust. We put our trust in them, they act on our behalf. Many of these trustees are paid and in that case we need to be doubly careful that they really are impartial.
“Impartial means treating all parties equally”, it’s about even-handedness. It is not about squeezing the pips of the fruit, nor is it about taking Wimbledon tickets to turn a blind eye.
It requires scrutiny and it requires openness.
Which is where I get to the contentious bit…
The reason trustees exist is to impartial but they themselves must be accountable. Because of the enormous asymmetry of information between those in the know – the pension and funds industry– and those not in the know- everyone else.
Two case studies (stories)
I had two conversations last week which demonstrate just how hard it is even for a professional , to know what is really going on.
Legal & General
The first was with Legal & General. I asked what I was paying for the funds that i was investing in and what they were paying. They gave me their “factory gate” price which is what they pay and told me I pay the same amount, everyone pays the same amount. They then explained that I paid an amount on top which covered not the Fund Cost but Legal & Generals costs for providing all the services I use to get fund values ,make changes and ask questions.
The second was with a master trust which has been set up by a pensions consultancy. They told me how much I would pay to them as the overall managers of the trust but would not tell me what they were paying the fund managers for their services, the administrators for managing the funds or the trustees employed. So I couldn’t work out what they kept for themselves.
That’s the basic difference, with Legal & General I was clear about who was getting what, with the consultancy, I wasn’t.
We think it really important that we are allowed to know what we are paying for. I may be a super-purchasing adviser, but I am responsible for my client’s experience and that means I have to know what is going on. I will ask the trustees of the consultancy master trust what is being paid for these funds, if they will not tell me, I will report this to First Actuarial who rate provider products so that employers choosing pension on www.pensionplaypen.com get a proper assessment of what is going on.
So as it stands the consultancy master trust will not appear on www.pensionplaypen.com and if asked why, we will say we have insufficient information to rate it. That is not the same as saying that it might not be a good master trust, it simply states the fact- we don’t know.
Legal & General is both a very good pension provider (they operate an IGC and a master trust). They are displayed on www.pensionplaypen.com and are regularly one of the leading players.
Whether you are choosing a platform in the retail space or buying a workplace pension , you are unlikely to know who is taking money off you and whether you are getting value for money. Even expert advisers like us know only some of the time.
We have taken a very simple stance, if a master trust or IGC will not tell us the underlying costs for fund management and the spread between what they are charging us and what they are paying for their money- we won’t deal with them.
Fund managers don’t want the prices they are charging platforms in the market. They put trustees under non-disclosure agreements so that they cannot share the price they are paying with members (or people like me).
This is because they are worried that their “best price” is in the market. They are right to be worried. Firms like mind aren’t interested in concepts like “leaving something for the next man”, that’s code for “where are my Wimbledon tickets”. We want the best price we can get and if fund managers are offering services on a tiered basis (where the price goes down as the money goes up) we’re happy with that.
Why we are worried about non-disclosed deals is that they allow unfairness in the market. If Peter gets x and Paul get’s x+20, Peter robs Paul. If Peter and Paul see that the difference is because Paul is more expensive to deal with then he can throw his hand in with Peter , lump it or find someone else to deal with.
A red card to bad practice
We shouldn’t have to have rules governing this stuff, but the abuse of customers via non-disclosed commission deals (hard and soft), has meant that we have now to see legislation commanding trustees to behave in a certain way. A red card has to be shown to bad practice. Louis Suarez has to leave the field- no matter how alluring the thought of watching him might be!
So pretty soon, the Government will bring in rules to pension management via the DWP and fund management via the FCA which will make disclosure of underlying fees and costs mandatory to IGCs and Master trusts. We hope that this information will be available on request to members (and advisers), so I don’t ever have to write this blog again.
I hope that the consultancy that is holding out on this information are reading this and that they feed this back to their compliance and senior management teams. Because if the rules change- as we are told they will- I will be asking them the question again, and this time I will have no hesitancy in whistle-blowing on any deliberate non-disclosure.
The butter purchaser is entitled to know what the farm-gate price is , we’re allowed to know the factory-gate price. We know we need intermediaries but they should be operating in an open market in an open way.
Fund platforms have to come clean on their charges and until they do, people like me will be yapping around their heels like annoying Jack Russells, because that’s our job.
This article first appeared in www.pensionplaypen.com/top-thinking