BAN ALL REBATES

I have been bleating on for ages about how rebates serve NO-ONE and often get told that we need them to deliver the service we promise. I have not yet been persuaded that any argument is stronger than the needs of the client so I wondered whether it is worth looking at a straw poll of the profession on this.

I understand some businesses are supported by the rebates, but for the client they mean absolutely nothing. In fact, I suggest they go some way to unsettling an uneasy level of trust that we are starting to get with the wider public.

Banning rebates will create serious headaches and may damage some businesses, but everyone has been working towards transparency on the professional side, so any damage incurred by the industrial side is either down to its own arrogance or complacency.

The question I would like to know is, ‘SHOULD ALL REBATES BE BANNED?’

If you have a view, feel free to comment otherwise simply answer below with a yes or no and let’s see if we can all agree that rebates should go.

Share:

28 thoughts on “BAN ALL REBATES

  • The platform we use most (Ascentric) pay the rebates to the client. In fact, the client can log in to the system, go to the transaction history, and see the payments coming in. I see nothing wrong with this.

    If the platform is not passing the rebate to the client, banning is one solution, as long as it doesn’t stop the good guys from negotiating discounts and passing them on.

    So, don’t ban rebates, ensure full disclosure.

    Reply
    • I’d go along with that. And I can see the benefit of unit rebates (enhancements) rather than cash rebates (discounts) when you are investing into tax privileged environments like a pension, although if you are losing the value of the rebate to advice charges paid from the same tax wrapper that benefit disappears.

      Reply
    • Completely agree, Chris

      Reply
  • It’s not the pricing I object to – absolutely fine for different ‘prices’ to be obtained from different places.

    My problem is the client’s perception.

    1 – Dear client, we use a platform where the price quoted is what is paid…..except that the platform has a deal where the investment funds you use pays it back a bit of the charges you pay. Some of these will be paid back to you. Some of that may be as cash and some may be as units. We’ll then give some or all of that back to you. Sound good?

    or

    2 – Dear client, we use a platform where the charges quoted are what’s paid.

    I know it’s not entirely that way, but you get the point?

    Reply
  • I agree with Chris and Damian here.

    Firstly, there is nothing wrong with TRANSPARENT rebates direct to a client’s portfolio account. I’d even suggest that clients like to see cash rebates rather than being told they’re getting such-and-such a share class that carries a lower AMC than the XYZ class, or that they’ll get extra units/shares in dribs and drabs as rebates that would otherwise be in cash are automatically passed on as units in a fund.

    Human nature is to get a comfortable glow when it appears that one is ‘one-up on the Joneses’ and knowing that Fred and you both pay 1.5% AMC – but you get back 1/2 of that in cash…..

    On the other hand, it is a messy system and while I agree that I can look at a listing of transactions and see rebates coming in, there is no easy way of checking that the correct rebate has been given or applied. I’m not suggesting any malfeasance but mistakes do happen.

    My big concern would be that banning rebates entirely will lead to the chaos that is unit cancellation.

    On balance that’s a ‘No’ from me but with a plea for enforced transaparency.

    Reply
    • I should also have added that this doesn’t really affect us directly as platform choice is down to the IFA and, wherever possible and/or appropriate, we use institutional versions of funds where the question of rebate does not arise. It’s also academic when we’re using ETFs, ITs, equities, gilts….

      Thinking more about this, I’m going to come off the fence and go for no rebates BUT funds MUST be institutionally priced for fairness. Why should a retail investor be unduly penalised, especially if the bulk of the admin load is being borne by a platform?

      Reply
  • My ‘Executive Summary’ on the rebate saga. The case for cash rebates (to clients) is well proven over the last 10 years + (pioneered by Transact over the last 13 years and much copied by every single subsequent wrap market entrant). Unit rebates are a legacy from the discredited life company ‘smoke and mirrors’ style pricing of the last century and a proliferation of gradually lower priced share prices is a recipe for total confusion and will take a long time to happen and to implement.

    As far as explaining to clients is concerned, try explaining why he has less units at a higher price when you negotiate entry (via a platfrom) to an ‘institutional class’. Even experienced investors struggle with that one.

    Here’s what I blogged a while ago following the Schroder announcement of ‘Z’ class.

    This is exactly as predicted and feared. The great majority of fund groups are well advanced with similar plans.

    The problem is that without cash rebates also being allowed, how do any platforms or advisers (with sufficient ‘muscle’) negotiate even lower fund AMC without having a profusion of share classes (not to mention the costs of an additional share class being loaded against that class which could wipe out the advantage of a lower AMC) or a profusion of expensive micro deals through allocation of ‘bonus units’.

    The fact that seems to have eluded the FSA in their zeal against any hint of product bias (at least in the platform market if not in life company investment products which are rife with such ‘smoke and mirror’ pricing issues, including bonus units) is that there is absolutely no reason why fund charge should be the same on each platform (indeed they are not now) and that to inhibit pricing differentiation will increase rather than reduce prices. How can that be in investor best interests? How can anyone other than life company executives (and the FSA) think that ‘bonus units’ are superior to cash rebates.

    Stan Kirk.

    Reply
  • Maybe one day, for now my concern is it’s removed market forces by inhibiting negotiation, so charges can be levelled up not down.

    Reply
  • For me ban all rebates, openness and clarity the only way to develop trust by being trustworthy. PS You try working out it the right rebate has been paid.

    Reply
  • A little known story from the early days of Transact. The first twelve fund managers were signed up on a retention of 50 bps (on 150 bps retail funds) with the rest being rebated to the client. The ‘sales pitch’ to the fund managers was that this was a way of turning retail into wholesale business but they got 50 bps rather than the normal 25 bps on wholesale accounts. So premium priced wholesale business, not cheap retail.
    This lasted until the summer of 2000 when Cofunds and Fidelity FundsNetwork launched close to each other and all the managers then increased their retention to 75 bps, in line with what they got from the fund supermarkets. Transact was far too small to raise any objection at that point.
    All distribution channels need every mechanism at their disposal to get fund fees down and platforms are ideal ways to do that but it will happen in stages and not voluntarily from the fund management sector. This is why getting rid of price differentiation mechanisms like cash rebates is such a bad idea.

    Reply
  • When we’re talking about all this, our minds naturally go to the (few) groups who are providing very deep discounts below the new standard clean share class price of 75bps. Having done a bit of work on TCO recently across lots of the platforms/funds you use, there are indeed some rebating 90bps instead of 75bps, mainly to SL Wrap and Skandia. But the vast – VAST – majority are only kicking back an extra 2 or 3bps. Most of the deeper rebates go to platforms which charge a bit more. And of course, with such small differentials, your charges only have to be 3-5bps off the pace for the benefit to be flattened. So yes, banning rebates would flatten commerciality a bit. But I’d argue this market isn’t functioning in that healthy a way already – the discounts aren’t good enough. However, as an industry (me) or profession (you) we can’t let fund managers see this as a win – we need to find new ways to put the pressure on which isn’t just about share class proliferation. As Stan rightly says, that’s a pain in the ass (at least I think that’s what he said).

    I don’t know what another mechanism might be, but there are a bunch of smart people on here, I bet if we all sat down for a wee while with a bunch of tequila we could come up with something.

    If rebates are taxed, it’s game over anyway for the full fat classes and no-one’s going to bother rebating for a few bps on the new book (back book is different I guess).

    In all of this – 3bps to the client = marginal benefit. 3bps to fund manager or (before RDR) fund supermarket = MAASAI benefit.

    I’m not sure that helps…

    Reply
    • Brilliant stuff, guys.

      That’s why I love this place as you feel that maybe….just maybe we can make a difference.

      Reply
  • If all of parties were starting with a blank sheet of paper what would it look like? I’d suggest it would have to be clean share classes. Surely then anything else is just a transitional fudge until we get to that ultimate goal. Or am I missing something?

    Reply
  • In an ideal world, there would be clean shares classes & no rebates, but there are issues. It’s a free market, and platforms should be able to exercise their size to negotiate bigger discounts for their clients. This is not possible in a totally clean share class world, unless fund managers are wiling to issue different share classes for every platform with a different price. Which I can’t see, given that there is some evidence that some fund management groups are using the move to clean share classes as an opportunity to up their prices by stealth.

    Using retail share classes and allowing rebates allows platforms to negotiate deals. I don’t see a problem with this, as long as the client gets the rebate. Which they do, with “proper” platforms.

    During the move to universal clean share classes, which is going to take some time, cash rebates should be allowed to continue,as unit rebates are a total bugger’s muddle.

    Reply
  • The platform we use most (Ascentric) pay the rebates to the client. In fact, the client can log in to the system, go to the transaction history, and see the payments coming in. I see nothing wrong with this.

    If the platform is not passing the rebate to the client, banning is one solution, as long as it doesn’t stop the good guys from negotiating discounts and passing them on.

    So, don’t ban rebates, ensure full disclosure.

    Reply
    • Completely agree, Chris

      Reply
    • I’d go along with that. And I can see the benefit of unit rebates (enhancements) rather than cash rebates (discounts) when you are investing into tax privileged environments like a pension, although if you are losing the value of the rebate to advice charges paid from the same tax wrapper that benefit disappears.

      Reply
  • My ‘Executive Summary’ on the rebate saga. The case for cash rebates (to clients) is well proven over the last 10 years + (pioneered by Transact over the last 13 years and much copied by every single subsequent wrap market entrant). Unit rebates are a legacy from the discredited life company ‘smoke and mirrors’ style pricing of the last century and a proliferation of gradually lower priced share prices is a recipe for total confusion and will take a long time to happen and to implement.

    As far as explaining to clients is concerned, try explaining why he has less units at a higher price when you negotiate entry (via a platfrom) to an ‘institutional class’. Even experienced investors struggle with that one.

    Here’s what I blogged a while ago following the Schroder announcement of ‘Z’ class.

    This is exactly as predicted and feared. The great majority of fund groups are well advanced with similar plans.

    The problem is that without cash rebates also being allowed, how do any platforms or advisers (with sufficient ‘muscle’) negotiate even lower fund AMC without having a profusion of share classes (not to mention the costs of an additional share class being loaded against that class which could wipe out the advantage of a lower AMC) or a profusion of expensive micro deals through allocation of ‘bonus units’.

    The fact that seems to have eluded the FSA in their zeal against any hint of product bias (at least in the platform market if not in life company investment products which are rife with such ‘smoke and mirror’ pricing issues, including bonus units) is that there is absolutely no reason why fund charge should be the same on each platform (indeed they are not now) and that to inhibit pricing differentiation will increase rather than reduce prices. How can that be in investor best interests? How can anyone other than life company executives (and the FSA) think that ‘bonus units’ are superior to cash rebates.

    Stan Kirk.

    Reply
  • Maybe one day, for now my concern is it’s removed market forces by inhibiting negotiation, so charges can be levelled up not down.

    Reply
  • It’s not the pricing I object to – absolutely fine for different ‘prices’ to be obtained from different places.

    My problem is the client’s perception.

    1 – Dear client, we use a platform where the price quoted is what is paid…..except that the platform has a deal where the investment funds you use pays it back a bit of the charges you pay. Some of these will be paid back to you. Some of that may be as cash and some may be as units. We’ll then give some or all of that back to you. Sound good?

    or

    2 – Dear client, we use a platform where the charges quoted are what’s paid.

    I know it’s not entirely that way, but you get the point?

    Reply
  • For me ban all rebates, openness and clarity the only way to develop trust by being trustworthy. PS You try working out it the right rebate has been paid.

    Reply
  • A little known story from the early days of Transact. The first twelve fund managers were signed up on a retention of 50 bps (on 150 bps retail funds) with the rest being rebated to the client. The ‘sales pitch’ to the fund managers was that this was a way of turning retail into wholesale business but they got 50 bps rather than the normal 25 bps on wholesale accounts. So premium priced wholesale business, not cheap retail.
    This lasted until the summer of 2000 when Cofunds and Fidelity FundsNetwork launched close to each other and all the managers then increased their retention to 75 bps, in line with what they got from the fund supermarkets. Transact was far too small to raise any objection at that point.
    All distribution channels need every mechanism at their disposal to get fund fees down and platforms are ideal ways to do that but it will happen in stages and not voluntarily from the fund management sector. This is why getting rid of price differentiation mechanisms like cash rebates is such a bad idea.

    Reply
  • When we’re talking about all this, our minds naturally go to the (few) groups who are providing very deep discounts below the new standard clean share class price of 75bps. Having done a bit of work on TCO recently across lots of the platforms/funds you use, there are indeed some rebating 90bps instead of 75bps, mainly to SL Wrap and Skandia. But the vast – VAST – majority are only kicking back an extra 2 or 3bps. Most of the deeper rebates go to platforms which charge a bit more. And of course, with such small differentials, your charges only have to be 3-5bps off the pace for the benefit to be flattened. So yes, banning rebates would flatten commerciality a bit. But I’d argue this market isn’t functioning in that healthy a way already – the discounts aren’t good enough. However, as an industry (me) or profession (you) we can’t let fund managers see this as a win – we need to find new ways to put the pressure on which isn’t just about share class proliferation. As Stan rightly says, that’s a pain in the ass (at least I think that’s what he said).

    I don’t know what another mechanism might be, but there are a bunch of smart people on here, I bet if we all sat down for a wee while with a bunch of tequila we could come up with something.

    If rebates are taxed, it’s game over anyway for the full fat classes and no-one’s going to bother rebating for a few bps on the new book (back book is different I guess).

    In all of this – 3bps to the client = marginal benefit. 3bps to fund manager or (before RDR) fund supermarket = MAASAI benefit.

    I’m not sure that helps…

    Reply
    • Brilliant stuff, guys.

      That’s why I love this place as you feel that maybe….just maybe we can make a difference.

      Reply
  • If all of parties were starting with a blank sheet of paper what would it look like? I’d suggest it would have to be clean share classes. Surely then anything else is just a transitional fudge until we get to that ultimate goal. Or am I missing something?

    Reply
  • I agree with Chris and Damian here.

    Firstly, there is nothing wrong with TRANSPARENT rebates direct to a client’s portfolio account. I’d even suggest that clients like to see cash rebates rather than being told they’re getting such-and-such a share class that carries a lower AMC than the XYZ class, or that they’ll get extra units/shares in dribs and drabs as rebates that would otherwise be in cash are automatically passed on as units in a fund.

    Human nature is to get a comfortable glow when it appears that one is ‘one-up on the Joneses’ and knowing that Fred and you both pay 1.5% AMC – but you get back 1/2 of that in cash…..

    On the other hand, it is a messy system and while I agree that I can look at a listing of transactions and see rebates coming in, there is no easy way of checking that the correct rebate has been given or applied. I’m not suggesting any malfeasance but mistakes do happen.

    My big concern would be that banning rebates entirely will lead to the chaos that is unit cancellation.

    On balance that’s a ‘No’ from me but with a plea for enforced transaparency.

    Reply
    • I should also have added that this doesn’t really affect us directly as platform choice is down to the IFA and, wherever possible and/or appropriate, we use institutional versions of funds where the question of rebate does not arise. It’s also academic when we’re using ETFs, ITs, equities, gilts….

      Thinking more about this, I’m going to come off the fence and go for no rebates BUT funds MUST be institutionally priced for fairness. Why should a retail investor be unduly penalised, especially if the bulk of the admin load is being borne by a platform?

      Reply
  • In an ideal world, there would be clean shares classes & no rebates, but there are issues. It’s a free market, and platforms should be able to exercise their size to negotiate bigger discounts for their clients. This is not possible in a totally clean share class world, unless fund managers are wiling to issue different share classes for every platform with a different price. Which I can’t see, given that there is some evidence that some fund management groups are using the move to clean share classes as an opportunity to up their prices by stealth.

    Using retail share classes and allowing rebates allows platforms to negotiate deals. I don’t see a problem with this, as long as the client gets the rebate. Which they do, with “proper” platforms.

    During the move to universal clean share classes, which is going to take some time, cash rebates should be allowed to continue,as unit rebates are a total bugger’s muddle.

    Reply

Leave a Reply