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Identifying the ‘clean’ share class ensures you don’t pay over the odds
Thursday 29 Jun 2017 Author: Emily Perryman

Deciding which fund to buy is difficult at the best of times, but when you’re presented with lots of different versions of the same fund it can make the decision even harder.

Most investors should be comfortable with the fact that funds have an accumulation (Acc) and an income (Inc) version in addition to different currency classes, such as GBP, USD and EUR.

Some funds have seemingly random letters in their name – for example there is Neptune Global Equity Fund B Acc GBP (GB0030679160) and Neptune Global Equity Fund C Acc GBP (GB00B8DLY478).

If you make the wrong choice you could end up paying considerably higher fees. The B version of the Neptune fund has an ongoing charge of 1.34% whereas the A version has an ongoing charge of 0.87%. There are a whole host of funds that charge vastly different fees depending on which share class you look at.

Why do different share classes exist?

The Financial Conduct Authority (FCA) in 2014 banned the payment of trail commission by fund managers to investment platforms.

Previously, investors had to pay for this commission through the fund’s annual management charge (AMC). When the commission was banned, fund managers had to introduce ‘clean’ share classes – funds with no commission levied on them.

In general, removing commission resulted in the fund’s AMC being lower. To make up the commission shortfall platforms introduced a platform fee that investors have to pay – it usually ranges from 0.25% to 0.5%.

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Why haven't old funds been removed?

Fund managers and platforms were given a deadline of 6 April 2016 to either convert investors to the new clean share class or to ensure the commission gained from the old ‘bundled’ funds was passed on to the client, rather than the platform, through rebates.

The vast majority of old bundled funds have been converted to clean funds and removed from platforms. But there are still several bundled funds in existence, which even with the fund rebate can be more expensive than their clean counterparts.

Miranda Seath, head of intermediary research at Platforum, says one reason why bundled funds still exist is because some investors did not give their permission to convert to a clean share class.

Under the FCA rules, platforms had to notify their clients that they were making the conversion to a clean share class. Investors had the option to tell their platform if they didn’t want to be converted.

‘This was because the FCA acknowledged that in some cases clients might be worse off moving into a clean share class from a bundled share class. So the client was able to object to the conversion – meaning that their investments could continue to be held in the bundled share class,’ explains Seath.

AJ Bell Youinvest says bundled share classes still exist on its platform because customers have transferred in from another platform or direct from a fund group.

‘As customers are holding these funds we show the information on the fund in the research section of our website but they are not available to be purchased,’ says AJ Bell’s head of PR, Charlie Musson.

‘There is an ongoing programme where we transfer customers into clean share classes and we only add new clean share classes to the platform.’

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How do I identify clean funds?

The wide range of letters used by fund management companies mean it’s not clear at the outset which funds are bundled and which are clean.

Richard Bradley, head of data at financial consultancy Boring Money, says the key is to choose the lowest cost version of the fund.

‘In general, look out for letters like I (institutional), P (platform) and Z for the clean share classes. The letters A and R often denote the older share classes, which can include commissions, but there are exceptions to the rule,’ he says.

Clean actively managed funds tend to have an AMC of around 0.75% and an ongoing charge figure (OCF) of between 0.75% and 0.9%. You can also visit the fund manager’s website or a research site to check the various versions of the fund and the associated charges.

What happens if I buy the wrong version?

AJ Bell Youinvest says any of its customers who accidentally bought the bundled share class could convert to the clean share class free of charge.

In some instances it might not matter which share class you own – it depends on whether   the bundled fund rebate reduces the fund’s net charge to the same level as the clean version.

Justin Modray, director of Candid Financial Advice, says if the rebate reduces the fee sufficiently the performance of the bundled fund should be very similar to the clean fund, albeit waiting for the rebate could be a drag on returns in a rising market.

Modray says a lot of rebates are small or non-existent, particularly if you buy the fund direct from a manager. The typical annual cost difference between clean and bundled versions is 0.75%, which could also prove to be a big drag on returns.

Are there any other share classes?

Confusingly, some platforms have multiple clean fund versions. They are known as ‘super clean’ if the fund manager and platform enter a deal that results in lower fees being passed on to investors.

‘There might be one version for platforms in general, a cheaper version for the largest platforms who negotiate a better deal and occasionally a lower charge still for very large institutional investors such as pension funds,’ says Modray.

There’s no easy answer; research and a keen eye for detail are the best ways of ensuring you don’t end up paying more than you have to.

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