Three ways Novia can help you drive better long term client outcomes
- Author : Novia IQ
- Date : 2 Sep 2020
With the unprecedented events of 2020 ongoing and the environment for acquiring new clients still challenging due to the COVID 19 restrictions, we’ve been working with some of our advisory firms to help them review the value they deliver to their clients during these difficult times.
For many years now advisory firms have focused on trying to drive down the basic platform charges levied by providers. As we all know, cheap doesn’t mean better, but there are ‘hidden’ savings which can be unlocked for clients if you’re working with a partner like Novia Financial.
In this article we’ll review three areas where better client outcomes can be achieved, to help advisory firms demonstrate value to their clients:
Shielded share classes
It’s well known that the FCA are constantly reviewing value for money for investors, to eliminate actively managed closet trackers and drive down fees in the investment management industry for consumers.
Therefore, many fund managers now offer different priced share classes of their funds in the retail space, but they do not offer access to all investors. To help advisory firms drive down their clients’ investment fees in their advisory models, Novia enable cheaper share classes to be loaded to the platform and shielded for that advisory firm’s clients to access, driving better value for clients and keeping the fund manager protected in the process.
In some instances this has created a reduction in annual fund management fees of between 6 to 30 bps on some investment funds, where an advisory firm has negotiated access to a cheaper share class for a specific fund.
Any kind of fee reduction can have a positive impact on a client’s portfolio returns over the longer term and enhance your client relationship, so we expect this trend to continue due to the pressure being exerted on the fund management groups.
Novia can facilitate this process, unlike many other platforms, allowing advisory firms to negotiate directly with their selected fund managers for discounted share classes. This also benefits advisory firms who utilise DFM services, as they too have access to these systems.
Fractional Trading for Exchange Traded Funds (ETFs)
For those of you who know the ETF market well this will be familiar already, but just to clarify: many ETF funds have substantial unit prices, some being more than £400 a unit. The problem this creates is when you come to buy or sell down units to fund charges or withdrawals, you are forced to sell down more than you need, or indeed hold additional cash that you don’t want in your client’s portfolio as you can’t invest in partial units, creating a cash drag on performance. This can have a substantial impact on client returns over the longer term.
Novia are one of just a very few platforms who offer ‘fractional trading’ to remove the above issues, so you can buy or sell down partial units.
We have calculated that this can save as much as 1100bps* in client fees over a ten-year cycle…and no that is not a typo! Or put it another way, that would be an additional return of £11,267 on a client’s £100,000 portfolio over a 10-year period.
This makes Novia the ‘go to’ platform for many DFMs and advisory firms who run their own models and invest using ETFs.
Tax treatment of Notional Distributions
Another area of value which can be easily overlooked by advisory firms is how platforms treat notional distributions from a capital gains tax perspective (CGT) for clients who invest via a General Investment Account (GIA).
The Novia Capital Gains tool takes into account notional distributions on accumulation units, where income is reinvested back into units instead of being paid out to the Investor (as with Income units). Up until 6 April 2017, a withholding tax of 20% was taken from assets which contained at least 60% of fixed interest securities. This means there has always been the risk of double taxation. To avoid double taxation, the notional distribution is treated as allowable expenditure for capital gains tax purposes, and therefore the cost must be adjusted. The tool achieves this by raising the acquisition cost of the asset by the same amount as the notional distribution, removing it from CGT.
Additionally, where an Investor purchases units between the ex-dividend date and the dividend payment date, they will not be entitled to any income which has accrued in the fund before the units are purchased. Instead they will receive an equalisation payment, which represents the extra cost that they paid for the units (from accrued income) and is treated as a return of capital for CGT purposes. The capital receipt should therefore be deducted from the cost of the units for capital gains tax purposes when calculating the charge on eventual disposal.
We have calculated that this can save your clients as much as 191bps or £955 in tax on a £50,000 investment in some scenarios.**
Speaking with advisory firms during lockdown, it’s become apparent that this isn’t always the case with other platforms, so the quality of the CGT tool can really help in driving better client outcomes and serves as a good reminder to clients on how you manage their wealth to minimise their tax liabilities.
*Novia internal calculations for a £100,000 portfolio invested in 10 ETFs, assuming 8% growth pa and 16% volatility.
**Novia internal calculations for a £50,000 investment with notional distributions of £4,778 and assuming a 20% CGT liability.
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