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Unbundling Hargreaves' new charging structure

Hargreaves' unbundled charging structure represents a big improvement on what went before, but watch out for some cheeky hidden costs.

Unbundling Hargreaves' new charging structure

Is Hargreaves Lansdown’s announcement of its unbundled charging structure the start of a new cleaner era in fund investing? I think it probably is.

Hargreaves has hacked into its legendary profit margins to provide some investors with a combined fund and platform charge of just under 1% a year. It’s a big improvement on what went before.

But don’t be too seduced by the headline figures: there’s also some Ryanair-style hidden charges lurking in today’s announcement. For a rundown of all the changes, and some tips on how to avoid too hefty a bill, watch my video above.

15 comments so far. Why not have your say?

chazza

Jan 15, 2014 at 23:07

No mention of the egregious treatment of ITs under HL's new regime. What possible justification is there for treating ITs and ordinary shares differently? Both are traded on the stock exchange and one has to pay dealing charges on both. The cost of holding both in nominee is the same to HL. So surely they should be treated alike for fee purposes. Maybe it's a Ryanair ruse to uncap the management fee. HL would do well to ponder the fate of Ryanair as irritation at its trickery came to overwhelm its other attractions.

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Biga G

Jan 16, 2014 at 00:17

HL are not very happy with Investment Trusts. As I understand, they charge you to hold them in your account up to £45 per annum

Alliance savings doesn't - so if you are a clever investor who does Investment Trusts(rather than Funds) you are better off with Alliance Trust Savings

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Roger Lawson

Jan 16, 2014 at 10:28

For someone with say £150,000 invested in a SIPP containing a mixture of funds, investment trusts and direct shareholdings, the charges will potentially double from the previous cap of £200 per year to £400 per year because investment trusts will now suffer a separate cap. And yes I have spoken to Hargreaves Lansdown to confirm this. Why should investment trusts be treated any different to direct share holdings? It's absolutely obnoxious. Seems to be intended to encourage peoples into funds rather than investment trusts although the former typically have higher charges. They are likely to lose me as a customer because there are other providers who charge less.

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Anonymous 1 needed this 'off the record'

Jan 16, 2014 at 11:15

both my wife and myself have ou investment trust/sharer isa with selftrade they don't charge providing you trade once every quarter who is the looser now Hargreaves-

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Peter bryant

Jan 16, 2014 at 20:52

In particular I recent their intention to charge for IT'S held in the Advantage

share A/c (non ISA)) there is no justification for this. I am thinking of taking my

account else where

Has anyone got recommendations for alternative Share A/c's -non ISA

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SSJ

Jan 16, 2014 at 22:23

Biga G - when did you last look at Alliance Trust Savings costs?! They currently charge £48 per year and are about to increase this to £90 per year.

Also, HL seem quite happy with Investment Trusts now - over £10k they actually charge less for ITs than UT's because of the £45 cap on IT's.charges.

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Roger Lawson

Jan 17, 2014 at 08:20

The cap of £45 for investment trusts would only apply if you only held investment trusts and nothing else. If you also held shares, bonds or gilts (or even VCTs which are investment trusts also of course but something they can get introductory commission on presumably), then there would also be a cap of £45 on those, making £90 in all. It would be a rather odd portfolio that only held investment trusts.

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chazza

Jan 17, 2014 at 10:09

SSJ: 'over £10k they [HL] actually charge less for ITs than UT's because of the £45 cap on IT's.charges. Perhaps, but do check out the TERs of investment trusts, which range from about 0.6 to over 3%. I you hold ITs you are paying management charges in addition to any that are paid to a nominee service provider such as HL. Even so, investment trusts will likely continue to outperform similar funds / OEICs, mainly because they can borrow to invest (gearing) and because, as investment trusts become better known and more popular, discounts tend to narrow. That is all great in a rising market, But the fun will begin when the market falls, as it will some day, as discounts widen and gearing becomes a liability rather than an advantage. For that reason, a mixture of funds, shares and ITs will probably suit most of us, and a fee structure such as HL's, which is designed to discourage the holding of all 3 in the same vehicle, is very unattractive.

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Linda Green

Jan 17, 2014 at 18:49

My daughters have small amounts [about £3k] in an HL ISA, with proceeds being automatically invested when proceeds of each of the 2 funds reaches £50. Now the dividends will be automatically reinvested as soon as there is £10, at a cost of £1, or 10%. Because of this this quick reinvestment there is unlikely to be enough to cover the charges, so HL will sell some stock and charge for having done it.

If we change to have the dividends left in the account, so there is money for charges, then there is a minimum value of £250 of funds that can be purchased, so the money will have to sit there for years uninvested, earning no interest, until there is enough to use it to buy more units in the funds.

My daughters are students, and will not have money to pay in for some years, having to concentrate on their studies. They might not currently be very profitable for HL, but once they are earning they could well be in the future. They are being treated very unfairly, and I feel that the best course is to get there money out of HL as soon as possible.

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Medved

Jan 18, 2014 at 10:27

What about their exit fees ? I think you guys rushing to "get there (sic) money out of HL" will find they have recently gone up too.

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Mike Martin

Jan 18, 2014 at 13:57

I think there is a bigger issue with the HL charges that most of the media have not yet understood. The media will understand given time, and then brokers like HL will be in real trouble.

Up until now the (semi) 'hidden' commission going to brokers like HL has always been percentage based, regardless of whether percentage based commission could ever be justified.

There is no more work for HL to do if I buy & sell £100,000 worth of funds trust than if I bought and sold £1,000 worth. Yet the £100K customer pays one hundred times more due to percentage charging. Whether a customer holds a £100K or £1K portfolio of unit trusts/OEICs the cost spent by HL in supporting and managing those accounts are the same (assuming trades are of a similar frequency). So how can HL or any other broker justify ANY percentage based charges in this new world. They cannot.

The recent changes in the law is to be applauded i.e. stopping brokers from taking hidden commission. The change is already causing consumers to focus on examining these charges including exorbitant percentage charges. The selected committee that started this whole change should be congratulated.

Soon a broker (new or old) will break ranks and instead of charging a percentage portfolio fee (like HL) will instead charge a flat fee to hold a fund. The latter represents the real cost rather than a percentage portfolio fee.

When the above happens all consumers with largish portfolios will flood to that flat fee broker, and existing brokers like HL will be decimated in my opinion. Brokers like HL will be forced to adapt, but their cost base is probably already far too high after feasting for years on (unjustified) percentage based commissions that it will be very hard for these brokers to adapt in anywhere near a fast enough time.

What we will see is a repeat of 15 years ago when share trading got transformed. Then new brokers like Etrade entered the market and only charging a flat share trading fee (about £9.99 I recall). Basically their fee represented the real cost of share trading, unlike the percentage cost offered by most brokers at the time. The new entrants transformed the market, and all old style 'percentage' brokers including HL had to adapt or withdraw from the market.

We will see the same again but this time with funds.

I see charges dropping to no more than £24 per annum for each fund held in a portfolio. I derive that figure from HL's existing charges i.e. prior to the 1st March changes. If you currently hold a clean fund with HL that means the fund manager does not pay HL any on-going commission. To cover HL's own costs HL currently charges a platform fee of £2 per month for each 'clean' fund held. Many index trackers are clean funds, as are some non-tracker funds.

If HL currently only charges a platform fee of £24 pa for these clean funds how can it possibly justify charging 0.45% after 1st March. In my opinion all the brokers charging percentage platform fees are going to be found out soon.

Just to illustrate the point. Anyone that has put a reason amount into stocks and shares ISA over the last 15 years will almost certainly be sitting on over £100K in their ISA. Let us look at an example where such a typical ISA customer invests their £100K portfolio across four clean funds. Currently HL's annual charge for four clean funds is 4x£24=£96. After 1st March (when all new purchases must be into clean funds) HL are no longer going to charge a sensible flat fee per fund they are going to charge 0.45% p.a. of the portfolio value. So the person with a £100K (clean fund) portfolio finds his HL charge rockets from £96 p.a. to £450 p.a.

Currently, HL would not be charging just £24 p.a. per clean fund if that did not cover HL's true cost. So £96 p.a. is likely to be the top end of the real cost to HL and not the exorbitant £450 p.a. That is, HL look to be planning to charge a person with a £100K portfolio four and a half times more than can really be justified. Unfortunately, brokers like HL have got so hooked up on percentage commission for so long I am not sure they can see the wood for the trees any longer i.e. they cannot see the inevitable move to flat platform fees occurring.

No doubt HL's (marketing) answer is to say they are trying to be helpful to investors with small portfolios. The problem is that their whole business model is not based upon those smaller investors, it is dependent on retaining the investors with large portfolios where a 0.45% fee represents a large annual fee.

All brokers like HL that continue to opt for a percentage charging fee have a big shock coming as all they will be left with is the small investors, which will not support their business model. Most consumers with larger portfolios will find it much cheaper to move to a flat fee platform as new entrants enter the market.

So far HL have missed the opportunity for cost cutting and adapting to a new world were percentage platform fees can no longer be justified. All they have done with their latest changes is try a small tweak to their percentage platform fees, and come out with a ridiculous marketing story of super cheap funds, when the opposite is true. They will be found out in my opinion, and hopefully soon.

Basically brokers like HL look to be committing suicide in the medium term.

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SSJ

Jan 18, 2014 at 14:39

Mike Martin

"...Soon a broker (new or old) will break ranks and instead of charging a percentage portfolio fee (like HL) will instead charge a flat fee to hold a fund...."

Alliance Trust Savings have been doing something very similar for years (in fact they charge a flat fee to hold any number of clean funds, and charge to buy and sell). They haven't dominated the market, and they currently have many customers grumbling and fleeing because their flat fee has just gone up to £90 per year Similar story with SIPPDEAL.

I think HL's response to your £100k example would be (I'm paraphrasing): "Previously we were taking £750 [0.75% uncapped] from you [via the fund manager] so you will now be £300 better off. Our fee for funds continues to be uncapped.Previously we obscured our charges, now we obscure your discount [of the AMC]. It's psychology vs mathematics"

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Mike Martin

Jan 19, 2014 at 09:03

SSJ, your post reveals, in the past I had been too complacent for too long and not looked at the charges of other competitive platforms since I moved to HL about a decade ago.

A decade ago HL were easily the lowest cost option for me, plus they had the widest variety of funds available. Unlike all other fund supermarkets at the time they did offer funds that did not pay commissin to the broker (in addition to the usual commission based funds).

What this change in the law has done, plus the accompanying press, is to caused me to re-analyse HL and competitors charging structure, which I am in the middle of currently doing. I rather suspects I am just one of many hundereds of thousands of consumers doing the same at this time.

I have already concluded that I almost certainly have to move from HL to save considerable cost. Possibly to Alliance Trust or Interactive Investor. I have already done detailed analysis of my specific fund portfolio with the new HL charging structure, and I will only save a small amount and nowhere approaching your figure of £300. I will save far more with Alliance Trust or Interactive Investor.

Of course I need to do more detailed research before finalising a decison, including analysing those funds supermarkets that have yet to reveal new platform prices. However, that is the beauty of what the new legislation has done. The change in the law has significantly improved transparency, and has thus encouraged people like myself to realise how much we are really paying brokers to hold our funds. In my case it is well in excess of £1,000 p.a. There is no way it would cost HL anywhere near that amount to support and manage mine and my wife's specific ISA funds.

I now realise for sure how much HL have been making out of me for the past decade. I rather suspect I will be just one of a hundred thousand others coming to the same conclusion and considering a change of platform suppliers.

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Mike Martin

Jan 19, 2014 at 09:33

By the way, I believe your £300 figure is based upon a false premise. The Broker figure of 0.75% is the gross figure, not the net figure.

Currently, for a typical (non-clean) fund, HL does take 0.75% comminision but they then typically rebate 0.25% of that back to the customers. So the existing effective net HL platform cost is 0.5%, and not the 0.75% figure.

From 1st Mar that net 0.5% figure just reduces to 0.45% i.e a saving of only £50 p.a. on a £100,000 portfolio, not the figure of £300 that you quote.

If you already hold some clean funds with HL (as I do) you won't even save £50 and may end up paying a lot more overall not less (as after 1st Mar the cost of holding clean funds with HL goes up considerably).

I know HL will argue that for some funds (if you are lucky) the fund mangers' own charges will reduce fron 0.75% to 0.65%, which might result in a better saving than £50, but it will still be nowhere near £300.

In any case I cannot see Fund mangers being allowed to get away with offering the lower preferential charges exclusively to HL. That would be anti competitive and HL being allowed to use their dominate market position to get preferential treatment only for their customers. HL might get away with it for a short time, but I sure there are powers that be already working on ensuring there will be a level playing fields in future. Thus I would not base any broker decision on getting lower fund manager charges exclusively on HL platforms.

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chazza

Jan 19, 2014 at 10:16

Good point, Mike. HL must be terrified that they will be referred to the Competition Commission. With 30% of the market, HL would already be considered to have too large a market share if it were a bank.

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