Make no mistake, Hargreaves Lansdown is to UK retail investing what Apple is too smart phones or Google to the internet, they are all enormous and dominant.
As we are based in Bristol we know them well and have observed a number of companies seek to challenge them, any are yet to succeed (and many have failed).
We suffer from no Hargreaves envy; they do what they do exceptionally well and have created a tremendous business. Their success has been aided by a number of factors which they were smart enough to recognise and maximise, in our view the three most important being.
1. They recognised the power and utility of the internet and created a first class web offering, over 50% of their business is transacted online and this is growing
2. They capitalised on the growing disillusionment with the financial services industry (endowments, with profit bonds, high commissions etc) to position themselves as offering client focused advice and great value in a treacherous environment for individuals (‘Honest Pete the Punters Pal’)
3. They benefited from the Government mandated reductions to initial commission which has moved financial planners away from clients with less than £100,000 of investable assets
However what we always knew was that many clients were under the impression Hargreaves didn’t charge them commission; of course this wasn’t the case, they did.
The funds they sold levied an annual charge to a client of up to 1.5% and the fund manager rebated (gave back) up to 1% of this to Hargreaves. Its true Hargreaves didn’t directly receive money from clients but the clients charges were Hargreaves income so it’s all in the telling.
Bundling (which is what this is called) is shortly going to be banned, the new rules require all fees charged to be explicit, so no longer can Hargreaves receive rebates. Clients will now know explicitly what Hargreaves are actually charging, because they legally have to tell them.
Over the last 18 months we have wondered whether many Hargreaves clients would feel slightly duped when it became clear that they had in fact been charged or whether they actually wouldn’t care.
We were also quizzical about how much Hargreaves would choose to explicitly charge. Some of the rebates they received on high volume funds were chunky, how would they match these as explicit fees and if they didn’t how much would their income reduce by?
George has written a detailed review of the new Hargreaves offering, we have no axe to grind, no horse in the race, we are just interested bystanders with enough knowledge to work through the detail to see what they are now doing.
See what you think.
The analysis – an overview
For some time Hargreaves has been the champion of the direct investor community, and the darling of the city fuelling a meteoric rise in their share price.
It’s not hard to see why – they have slick systems, an excellent marketing communication machine and a dominant position in the market place. And for many investors there was a belief that the Hargreaves investment platform was effectively free and certainly they played on this.
Their new pricing structure has been eagerly awaited by many (well perhaps more the City and competitors rather than investors!), and in this report we want to unpack their new offering so investors can make informed decisions.
Bundled v unbundled – what does this mean?
A bundled fund has one annual charge, say 1.5% p.a., it is collected by a fund manager but then this is split so part of the payment goes to Hargreaves and part is retained by the investment house. The actual amount going to Hargreaves was not disclosed but is usually between 0.5% and 1% p.a. Hargreaves then gave part of that payment back to clients as a loyalty payment, typically around 0.15% p.a.
The problem with this approach was two-fold, firstly the end investor doesn’t know what Hargreaves are receiving and therefore cannot determine whether the payment reflects value for the service they receive and secondly there is always going to be a risk that there is a bias to promote funds which pay more money (we are not saying they do but there is always a doubt).
Unbundled funds (the new rules) strip all of that away. Hargreaves, or any other retailer, can no longer receive rebate payments. Their charge must now be visible so the end investor can judge whether it is fair, and because nobody can receive a kickback for promoting funds this removes any bias doubt.
What you will have with the new unbundled system is an investment house charge and a Hargreaves charge.
What are the new Hargreaves explicit charges?
If you have OEIC funds only then the charges are pretty simple to understand. (The average investment per client according to the Hargreaves accounts is around £40,000).
Hargreaves will charge these clients 0.45% p.a. on the first £250,000, and then a lesser amount on a tiered basis for larger values
So on £40,000 the charge will be £180 p.a., and as the fund value increases so does the charge. We will look at other platforms in separate reports but to compare, iii.co.uk have a flat fee of £80 p.a.
But, the devil is in the detail.
1. The 0.45% p.a. charge is per account – so for example if the client had an ISA of £150,000 and a personal account of £150,000 they wouldn’t get the lower tier for having over £250,000, the ISA is 0.45% up to £250,000 and so is the personal account.
Other direct providers take into account all assets held on the platform when calculating the charge and any discount.
2. The second point is that for many direct providers not only do they take into account all assets held, they also take into account family accounts. So for example on iii.co.uk if the investor had £150,000 in an ISA and the same in the personal account, and the spouse had the same. The total charge would be £80 per year. For Hargreaves this would £2,700 per year.
3. The third point is around the funds; effectively clients can transfer their assets to the new unbundled funds. When we spoke to Hargreaves they did indicate that for assets outside an ISA or SIPP this could potentially trigger a capital gains tax liability, so investors need to be careful when making this choice. (This will be the same for any provider moving from bundled to unbundled so is not a specific issue).
Clients can stay in the bundled funds and Hargreaves have confirmed they will no longer take any rebate, effectively this will come back to the investor as a loyalty payment. Investors need to be aware that for assets outside an ISA or SIPP this will trigger an income tax charge.
Is there anything else you should know?
Many clients use tracker or passive funds, these track an index such as the FTSE 100 or S&P 500. The advantage with these funds is that they are cheap. For example, a typical passive fund costs around 0.25% p.a., Hargreaves previously charged £1 or £2 p.m. for these holdings.
The new charge is 0.45% p.a. – a typical investor with £40,000 invested with the £24 p.a. charge would have been paying 0.31% p.a., now they will be 0.70% p.a. In monetary terms this is an extra £156 p.a.
Moving to the new structure brings another complication; an investor now has to ensure they have sufficient cash in their account to pay the annual charge of 0.45%.
If there is insufficient money in the cash account to pay the fee then Hargreaves will charge the investor £1.50 and sell down investments from the highest holding. Hargreaves has confirmed this charge will be taken monthly. So potentially failure to have sufficient cash will force a charge of £18 per year, per account. (Plus possible capital gains tax liabilities).
They have also introduced charges for paper based statements, the aim is to bring everything on-line which is cheaper for them to administer.
Can you move?
Yes but if an investor wants to keep their existing holdings (an in-specie transfer). Hargreaves charge £25 per line of stock per account to transfer assets to a new provider. If an investor has ten holdings they will have a charge of £250 plus a closing account charge of £25.
In addition if the investor just wants to move cash they will be charged £25 for closing the account and £25 for moving the cash.
Do Hargreaves offer good value?
Hargreaves offer a number of benefits and this is where the investor needs to weigh up whether the cost is worth these benefits (which they can now more easily do with explicit charging).
Over the coming months we will review other platforms, certainly at first glance for an ISA and personal account where investors can have fixed fees of £20 per quarter across all accounts as well as family accounts with other platforms they do seem expensive. On the pension side it is more complex and we will review this in a separate report.
Hargreaves added value:
1. Clients receive Investment Times – a magazine for clients highlighting investment ideas. As Hargreaves no longer have an incentive to promote funds offering higher rebates then this becomes more reliable. Investors may see this as value added research
2. Pricing power – Hargreaves are a dominant force in the direct to consumer market and are likely to be able to drive down costs, this no longer benefits Hargreaves but does benefit their investors. They have agreed significant charge reductions on 27 funds (out of a universe of 2000 plus) below the average charge (they confirmed) of around 0.65% p.a.
So where now
For the average investor (for £50,000 of portfolio of assets on the platform) there is no substantive change in monetary terms, what has altered is the visibility of the charges.
Hargreaves has confirmed that these changes will cost them several million pounds and its unknown if this will have an impact on the service they currently provide. As investors the decision is really whether they value what they receive in terms of marketing information, the service proposition and the interface against what others may offer at a potentially cheaper price.
For Hargreaves our guess is that they are confident that customers see their value and continue to invest with them, and with their dominant position they continue to attract new business. Certainly those holding their shares, frequently share this hope!
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.