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Hargreaves Lansdown slashes costs for most fund investors
(Update) The UK's biggest funds supermarket has cut the price of investing in unit trusts and open-ended investment companies. But not everyone is happy. We explain what has happened.
by Gavin Lumsden on Jan 15, 2014 at 17:20
Hargreaves Lansdown, operator of Vantage, the country’s biggest funds supermarket, has unveiled its long-awaited ‘unbundled’ charges in a move that could herald a new era of cheaper charges for many UK fund investors.
The company claims its new two-charge structure will save money for most of its 520,000 customers. However, a large number of tariff changes makes the situation complicated to understand. Around one in five Vantage users will pay more than before, although the company says the increases are mostly small and can be avoided, for example by moving accounts online.
The main changes for fund investors
The main changes are that from 1 March investors in unit trusts and open-ended investment companies (Oeics) will pay two charges on Vantage where previously they paid a single annual management charge (AMC) on their funds:
- a new annual fund holding fee for each account they have and;
- an annual management charge (AMC) on their funds that is lower than they have paid before;
- The combined effect of these could cut the annual cost of investing in funds on Vantage from around 1.5% to around 1%, a reduction of a third, although there will be wide variations.
In some cases savings could be greater. The company claims a typical customer investing the full ISA annual allowance of £11,520 in unit trusts and Oeics would now pay £33.41 a year under the new tariffs compared to £73.73 previously.
Chief executive Ian Gorham (pictured) said Hargreaves Lansdown had responded positively to demands from the regulator that fund supermarkets and stockbrokers stop taking rebates – or kickbacks – from fund managers and price their services more transparently.
Gorham said: 'We have put our prices down considerably as well as taking the opportunity to negotiate lower annual management charges on funds.'
Most of Hargreaves' customers are smaller investors and Gorham said the company had taken care to ensure they did not lose out. With reference to the so-called 'advice gap' caused by banks withdrawing from financial advice after the abolition of commission last year, he added, 'we see ourselves as part of the answer to that'.
However, critics accused the company of burying a raft of charges underneath the headline-grabbing rates.
Nick Hungerford, boss of online fund manager Nutmeg, said: 'Hargreaves has missed a golden opportunity to simplify charges for customers. Looking at the new Vantage tariff we see no fewer than 73 lines relating to different charges!'
Among the losers are:
- customers who want to receive paper statements and valuations in the post. They will have to pay a £20 + VAT a year;
- investors with big holdings in tracker funds who will see a hike in charges as a small monthly platform fee is replaced by the larger, percentage based account fee.
- investment trust investors, particularly those holdings shares alongside those funds, as each will be charged separately. This will double the costs for some invetors and has provoked an outcry. See our separate report on this.
Hargreaves' shares slide
Mark Till of Fidelity Personal Investing (pictured), an arch rival to Hargreaves, said the extra charges would enable Hargreaves to recoup some of the cuts in its headline fees. He vowed Fidelity would undercut Hargreaves with a more transparent offering when it announces its new charges next week. 'We will be a lower cost provider and we will not hit people with lots of additional charges,' he said.
Nevertheless, in the City Hargreaves Lansdown (HRGV.L) shares slid 63p or 4% to £14.45 as shareholders worried about the £17 million hit the changes could cause the company in the next two years. It made over £195 million in pre-tax profits last year.
There may have been an element of profit taking in the sell-off as the stock doubled in value last year and rose ahead of today's announcement. This followed an upgrade by analysts at Morgan Stanley who said the company had a big opportunity to win new business and that this would offset the impact of lower prices. Hargreaves Lansdown agreed, saying it has to attract £3.5 billion in new business over three years to offset the impact of lower fees. In 2012/13 it attracted inflows of £5.1 billion so the target should not be a problem, although the firm does now face stiffer competition from cheaper rivals, which also include Charles Stanley.
What will customers see?
Hargreaves Lansdown customers should have received letters today explaining the charges. There is a good explanation page on its website as well as online calculators for people to assess the impact on their holdings.
Essentially, what is happening is that the current all-in, ‘bundled’ AMC of around 1.5% that customers pay on funds investing in shares (it's lower for bond funds) is being replaced by a new fund holding fee and a lower AMC on their funds.
Stepped account fee
The account fee will apply to each account investors hold on the Vantage platform (eg, ISA, Sipp, Fund & Share dealing account). It will be stepped so that most customers will pay 0.45% a year on money in each account for balances of up to £250,000.
As the money held in an account rises above higher steps the rate of the charge falls: to 0.25% for money between £250,000 and £1 million; and 0.1% between £1 million and £2 million. Money above £2 million will not be charged. Customers with big balances may find it difficult to work out their charge.
In practice investors will need a lot of money to qualify for the lower rates. For example, investors with £150,000 in both an ISA and a Sipp (self-invested personal pension) would find the total £300,000 did not get them the 0.25% rate which requires more than £250,000 in an account.
Lower fund charges
To offset the new account charges, the AMC on the 2,000 or so funds on Vantage will roughly halve to an average of 0.71% a year.
Unit truts and Oeics that are on the Wealth 150 list of recommended funds will benefit from a lower charge, typically 0.65%, says Hargreaves Lansdown.
In addition the company has negotiated special deals with investment groups for 27 ‘favourite’ funds it is labelling ‘Wealth 150+’. For these the average AMC falls to 0.54%, a 0.16% discount to the standard market charge, it claims. The identity of these funds has not been revealed yet.
Mark Dampier, head of research, said there had only been one fund change to the list, which despite its name, only includes 91 funds.
He denied Wealth 150 was clouded by commercial considerations saying it was purely investment led. 'It's not in our interest to put people into poorly peforming funds,' he said.
What do customers need to do?
Strictly speaking Hargreaves Lansdown customers don't need to do anything other than take the time to understand the new tariffs.
It's important to realise that the new discounted deals on annual fund charges apply to new investments only.
However, existing holdings in unit trusts and Oeics are not losing out.
To ensure customers do not continue to pay the old higher unbundled charge on their current investments, Hargreaves Lansdown is boosting the loyalty bonuses customers receive on existing holdings in funds and Oeics. These bonuses could jump from 0.17% of the balance to as high as 0.75%. This isn't Hargreaves just being generous, it is doing this in order to align the overall charges paid on existing and future investments. In this case Hargreaves is taking with one hand and giving with another.
Investors can choose to switch their existing holdings to the new clean, unbundled, shares classes if they wish but they don't have to. However, some of the best deals Hargreaves has arranged will only be available to people on the unbundled share classes.
Perhaps the most eye-catching deal revealed by Hargreaves today was a 0.06% AMC on two tracker funds from BlackRock and Legal & General.
All of this means Vantage customers should pay a lot less for the funds supermarket so long as they are not investors in investment trusts, which are the big losers from the price changes.
An investor with under £250,000 in unit trusts and Oeics outside the Wealth 150 will pay 1.16% instead of 1.5% a year. For funds in the Wealth 150+ list this could fall to 0.99% a year, a reduction of a third.
The repricing comes two months before a deadline set by the Financial Conduct Authority which has ordered direct to investor brokers to stop taking rebates – or kickbacks – from fund managers. Previously, brokers would take between 0.25% and 0.75% of the 1.5% AMC.
Investors will be able to set up regular savings schemes into shares and investment trusts starting at £50 per month and costing £1.50 a trade instead of the normal share dealing charge which starts at £5.95.
The application of separate charges for investment trusts, however, undermines that benefit.
Reinvesting dividends and investment income will also become easier as the automatic facility will kick in when the income balance hits £10 per holding, rather than the current ceiling of £200 for shares and £50 for funds.
Gorham said: ‘We are pleased to announce that we have negotiated new lower cost funds for our clients; changed our pricing structure to the benefit of the majority of our clients and further improved the excellent service we provide.’
Hargreaves: a bit like Ryanair!
Watch my video comment on the news from Hargreaves Lansdown to hear my initial reaction to its unbundling of charges.