The legacy share class scandal

Posted by TEBI on August 1, 2020




I had a nasty surprise the other day. I finally got round to reviewing our home entertainment package. It turns out we were stuck in a “legacy contract” which we first took out nine years ago. As a result, year after year, we’ve been paying up to twice as much as new customers for the same service.

It’s been painful enough watching my hapless football team given a regular mauling live on TV this season. The thought that I’ve been royally ripped off for the privilege of doing so makes it all the more galling.

Yes, I know. Me of all people. And it’s not enough TEBI colleague Lesley Gregory hasn’t warned us.

But it could have been worse.

I could, for example, have been stuck in a legacy share class with Jupiter Asset Management.


Overpayment on a different level

Jupiter, one of Britain’s biggest asset managers, has announced that it’s going to move almost 50,000 fund customers from legacy share classes into cheaper ones, as part of the new Assessment of Value rules introduced by the Financial Conduct Authority.

Believe me, compared to being in a legacy contract with a utilities provider or insurance company, the sums of money that investors have overpaid to firms like Jupiter is on a completely different level.

This, alas, is a widespread problem. A report last November claimed that more than a fifth of the assets owned by UK retail investors are in share classes that continue to pay trail commission to financial advisers.


Nothing done for years

Some of these legacy share classes are hugely expensive compared to what’s on offer today. The industry knows this very well and yet it’s done next to nothing about it for years.

Worse still, it’s pretended that it was too complicated to move clients into cheaper share classes. Now the regulator has told them to do it and, hey presto, it’s done.

There’s no reason why firms like Jupiter couldn’t have put matters right years ago.


Progress at last

The good news is that, after 20 years of consultations about these sorts of issues, regulators are starting to take action.

The Assessment of Value regime, which finally forced Jupiter to do the decent thing, is undoubtedly a positive step. It’s no longer enough for firms to talk about adding value; you actually have to prove that you do.

The problem is that it’s hard to claim that any actively managed fund adds value compared to an equivalent index fund.

Over meaningful time periods, only around 1% of funds beat the index on a cost-and-risk-adjusted basis. Identifying the outperformers in advance is all but impossible.


Industrial-scale value extraction

Yes, the performance of Jupiter’s funds, relative to index funds, has been poor. But it’s on a par with that of most other UK fund managers. We have a whole industry here that has been extracting value from investors for far too long.

I haven’t studied the details of the Jupiter case, but any company that is found to have been deliberately opaque and obstructive should be made an example of.

Financial penalties should be far more severe than they have been to date. The fines handed to fund houses in the past have been a drop in the ocean.


Time to punish individuals

I would also like to see senior managers at errant firms punished as well.

Good organisational culture starts at the top. If certain individuals are found responsible for encouraging unethical or unprofessional behaviour, they should be barred from holding senior posts in the industry ever again.

In the meantime, why not have a look through your own investments to see if you’re paying more than you should? If you have a financial adviser, ask them — remembering, of course, that they might still be receiving commissions from your fund manager. Don’t let it rest until you have a satisfactory answer.

Oh, and you might want to check those cable TV bills too.


Here are some recent TEBI posts you may have missed which we think you’ll find interesting:

Is Vanguard the Tom Hanks of asset management?

Market timers are fooling themselves

Leave alpha to the daredevils

Stop admiring your successful trades

Three truths about ESG investing

Hedge fund fees are much worse than you thought

Should you invest with Baillie Gifford?

Is there such a thing as a “normal” stock market?

Active or passive — which is more volatile?


© The Evidence-Based Investor 



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