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Hargreaves Lansdown cuts interest rates to the bone
Hargreaves Lansdown, the country’s biggest ‘funds supermarket’, has slashed interest rates on its Vantage platform.
Hargreaves Lansdown, the country’s biggest ‘funds supermarket’, has slashed interest rates on its Vantage investment platform.
From 10 August the gross rate of interest paid on cash held on its investment accounts will halve from 0.1% to just 0.05% for balances between £7,000 and under £50,000.
Cash balances over £50,000 will drop from 0.25% to 0.1%.
The rate for balances between £1,000 and under £7,000 stays at 0.05% while cash under £1,000 continues to receive no interest at all.
The move affects cash held by investors on Hargreaves’ stocks & shares ISA, Sipp, income drawdown and fund & share accounts.
Like many companies, Hargreaves blames the government’s funding for lending scheme for depressing savings rates. It said Libor, the inter-bank lending rate at the heart of last year’s fixing scandal, had halved in the past year. Its policy is to spread client cash across Barclays, HSBC, Lloyds and RBS, none of them big payers for online, instant access accounts.
Surprisingly, even after the cut Hargreaves pays a better interest rate than some of its rivals. BestInvest and Alliance Trust Savings, for example, pay no interest at all on cash held by investors on their platforms. Fidelity FundsNetwork does a bit better offering 0.1% on balances up to £300,000, rising to 0.2% and then 0.5% on cash balances above £1 million!
All these rates are well below inflation meaning that investors' cash is losing value in real terms. However, the miserably low returns have to be set in context against the ultra-low 0.5% Bank of England base rate, which has been stuck at this level for four years.
Danny Cox of Hargreaves Lansdown defended the cuts: ‘The Vantage cash accounts are immediate access trading accounts. Clients can withdraw or invest without charge at any time. Most current accounts pay no interest at all and many savings accounts on the high street have bonus rates where interest is lost on withdrawal.’
Nevertheless, the move risks charges of profiteering by the Bristol-based, FTSE 100 company.
According to its latest results, Hargreaves Lansdown generates nearly a third of Vantage's revenues from earning interest from customers’ cash holdings.
This is a big money spinner because 11% of the £28.5 billion held by investors on the platform is in cash rather than being invested in funds and shares.
As a result in the second half of 2012 Vantage generated £34.5 million of its £110 million revenues from ‘interest receivable’. This had leaped from £22.7 million a year earlier. Vantage accounts more than three quarters of group revenues.
Cox pointed out that Hargreaves did occasionally offer better, short-term rates of up to 0.5% when they became available.
The interest rate cut comes at a sensitive time for Hargreaves Lansdown. The firm is under intense scrutiny as it reviews its charges ahead of next year's abolition of fund manager rebates, which have been its main source of income for years. Rebates – a share of the annual management charge levied by fund groups – will have to be replaced by fees paid by investors, raising questions over whether Hargreaves can maintain its high margins as customers pay for the service directly. Meanwhile the firm is pushing investment groups to offer it exclusive, low-cost share classes on their funds so as to protect its margins and convince its customers they're sill getting a good deal.
Hargreaves Lansdown (HRGV.L) shares have soared 67% in the past year. They are down 2.5p today at 903.5p.
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on Dec 13, 2013 at 05:00