I was pleased to see that certain restaurants in the US are banning tips and putting up the headline prices, as I have not been able to shake off the resentment of going for a $5.99 breakfast and it costing over $20. I would have been happy paying the $20 if that’s what I had been told. Budgeting must be a nightmare for Americans, but I guess they are used to it.
Conversely, in retail, when discounts are applied ‘at the till’, I feel good. As you would expect, there is some behavioural psychology behind this.
According to Kahneman & Tversky’s prospect theory, the first price you see becomes a mental “reference point”. When the final price is higher, that gap registers as a loss relative to that reference – and losses feel roughly twice as painful as equivalent gains, so a $20 “surprise” feels worse than simply seeing $20 upfront would.
Richard Thaler took this further with the idea of acquisition and transaction utility. Apparently, we don’t just consider whether the item is worth its price to us; we also separately evaluate whether the deal itself feels fair versus what we were led to expect. The low advertised price sets up my expectation of a good deal; the reveal destroys that expectation – so I feel cheated, even if the final price is still reasonable and what I would have paid.
It is therefore surprising that in CP26/24 the regulator proposes to create this consumer experience with its rules on transaction costs.
Pre-sale, firms will show a headline total of ongoing product costs + service costs, with product transaction costs disclosed as a separate line item, not included in the total
Post-sale, transaction costs are included in the total, so the consumer then sees a higher amount.
The two numbers have genuinely different rules: the actual underlying charges may be identical, but the headline figures consumers are expected to compare (pre-sale estimate vs. post-sale actual) will structurally look higher the second time. Not through commercial pricing techniques but through regulation.
It may not seem material, but if isn’t, why include it at all? Logically the transaction charges disclosed will vary depending on the transactions made, maybe 0.2% to 0.6% for active funds and maybe a tenth of that for passive funds.
With any such disclosure information, one of the key questions for me is ‘what am I supposed to do with it?’
The purpose should be to enable the consumer to make an informed decision, but what decisions can be made? I can’t decide not to pay transaction charges ex-post. More broadly, how often is there a genuinely aggregated buying point when the client can decide based on the total charges? With IFAs, they choose an adviser and their services, and that service includes later researching the best platform and investment, so those choices are separate and made at different times. Increasingly advisers have deals and or are explicitly associated with providers, so is the decision to work with them driven by the adviser, the platform, the investment or the aggregated proposition?
In theory, under CP26/24, an investor receives both pieces of information: initial disclosure when they buy the advice, platform and investment, and then the statement a year later. Imagine they are disappointed in the charge looking higher than they were led to expect and decide to act, what do they change?
They bought fund A on platform B advised by adviser C. They like A and B and blame C and so speak to a different Adviser D about it. Adviser D then provides initial disclosure for A, B and D, which is reassuring identical to what C originally disclosed. This does not require D to actually be cheaper, only to look cheaper at the point of comparison.
Alternatively, C could resolve it by switching the investment and or the provider.
If an investor decides to change one aspect, can they do so in practice and would the other discrete charges stay the same? While we have PROD and Consumer Duty obligations up and down the value chain, we also have very many different platform and MPS prices, depending on the advice firm, and fund prices, depending on the platform. So I could easily decide to change based on a misunderstood ex-post charge only to incur a real increase in charges as a result.
Could this create bias? If you have chosen to pay more for an active solution you want them to be making transactions when they think they should. The effect of those transactions is already reflected in unit price performance, so disclosing the costs is a double-counting bias against active. With Stamp Duty Reserve Tax included in the transaction costs, this also creates a bias away from the UK, contrary to the growth agenda. Unless SDRT is abolished in the budget.
However, tax that isn’t included in the fund performance could be a bigger surprise cost. Excess reportable income on offshore funds and CGT on unwrapped transactions can be reported and calculated differently by different platforms. The decision to change could incur CGT, even on in-specie transfers when the share class is different. CGT is a cost the investor has to assess and pay themselves and after the budget could be more common or at a higher rate.
While I was annoyed about having to put my hand in my pocket to pay unexpected tips and taxes as I left the restaurant, I would have been bemused and confused to be told the cost of all the activity between the farmer and the waiter that led to the meal I thought I had enjoyed.
Chris Jones is financial services director at Dynamic Planner
