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Hargreaves to cut investor costs and £2 passive fee
The introduction of new platform rules will see Hargreaves Lansdown overhaul its pricing structure to become 'more competitive'.
by Michelle McGagh on Apr 30, 2013 at 13:51
The country’s biggest discount broker Hargreaves Lansdown plans to reduce its charges and scrap a controversial £2 flat fee on passive investments as part of a shake-up that will make platform charges more transparent.
The Financial Conduct Authority (FCA) has delivered its final ruling on platform rules and banned fund manager rebates to platforms. These rebates allowed fund managers and platforms to agree a behind-the-scenes cost for funds and then for the platform to add a non-explicit charge on top for its services; this was known as bundled charging as the consumer paid one fee made up of a number of different charges.
Currently 43% of the assets held on Hargreaves Lansdown (HRGV.L) are in investments that don’t pay commission, including passive funds, ETFs, investment trusts, shares and cash.
Under the new rules charges must be unbundled and the fund manager charge and platform fee expressed separately. These changes mirror those in the financial advice world, where the retail distribution review (RDR) has banned life companies paying commission to advisers and made the adviser’s charges transparent.
Ian Gorham (pictured), chief executive of Hargreaves Lansdown, expects the platform’s prices to reduce under the unbundled charging structure and that the platform ‘will become more competitive than people expect’.
Change in pricing
Consumers will see a percentage and tiered pricing structure introduced, meaning they will pay a percentage of their assets as a fee but the percentage will decrease as their assets on the platform increase.
‘Tiered and percentage is best. Percentage is better for small investors and if you look at our average investment it is usually small, we want to be a friend of the small investor,’ said Gorham.
‘We want to appeal to small investors but also acknowledge the larger ones. If you've got £1 million, £2 million or £3 million [the tiered structure] makes sense.'
Gorham said in 18 months-time Hargreaves Lansdown would ‘still be good value’ but could not give final details of a pricing structure, more details of which are due in the autumn.
‘For example, an ISA charge is 0.6%, so we look after your ISA for £60 a year,’ he said. ‘At the other end, if you have £3 million, 0.6% is a lot of money so high-net-worth clients will do better because we are applying a tiered approach.
‘Around 75% of our investors have less than £100,000…it doesn’t mean we won’t reduce the 0.6%…we can negotiate a cut on the 0.6%. We will be more competitive than we are now, what I would say is that this is an opportunity for us to look at our prices but it’s not as simple as saying it’s going to go from 0.6% to 0.55%.’
Gorham added that the cost ratio of the business means that it cannot charge less than 0.28% because the company would make a loss.
It is not just overall costs that Hargreaves is rethinking. It also plans to change its monthly flat-fee of £2 that it charges on passive funds. Introduced in November 2011, the fee encountered criticism for making the tracker funds expensive to invest in.
‘It has been interesting but we may change it,’ said Gorham. ‘It works because it allows better access to passive funds. We have to charge something and the £2 a month fee worked-ish.
‘The flat-fee is not good for small investors so we may take the opportunity to change it.’
Clean share classes
Under the new platform rules, it is not just Hargreaves Lansdown that will be forced to make their prices transparent; fund managers will also have to introduce ‘clean share classes’ or a set price for their fund so the investor knows what they are paying.
A number of fund managers have come forward to announce new prices for funds, typically 0.75%, and Hargreaves Lansdown plans to have clean share classes on its platform by 1 January 2014.
However, Gorham said he will not accept the first price offered and is ‘putting out to tender’ to fund groups, which are expected to come back with a cheaper price than 0.75%, a saving that will be passed on to consumers under the new rules.
Some platforms, such as Alliance Trust Savings have already introduced thousands of clean share classes at the increasingly industry-standard price of 0.75% but Gorham said ‘when it comes to commission-free funds we are not just going to accept the price’.
‘Of course, [fund managers] would prefer we just accepted [0.75%] but we are not going to, we will get a better price,’ he said.
Gorham added that it would be ‘unusual’ for all companies to charge the same for their funds and that if the market colluded on a price ‘it must surely attract regulatory attention’.
Wealth 150 becomes 30
Gorham said another benefit of unbundled charging would be that it would prove that fund managers are not able to buy their way on to the Hargreaves Lansdown’s ‘Wealth 150’ list with bigger kickbacks to the platform, which the platform has been accused of in the past.
However, he said price would still remain a criteria when assessing a fund’s suitability for the list as ‘price and [fund manager] expenses detract from returns’ although there was no point having ‘a fund [on the list] that is cheap but performing dreadfully’.
The Wealth 150 could be revitalised as there is a diminishing number of funds that make the list, which currently stands at just under 100.
Gorham said that the list operated on a ‘two-tier system; you’re on the list or you’re not’. But a three-tier system could be introduced whereby funds try and battle their way on to a Wealth 30 of core funds that is then expanded out to cover all sectors that investors want to invest in.
Future of investment
Currently, just 20% of Britons own investments compared to 50% in the US and 80% in Sweden. In the UK the average amount invested in equity per person is £9,776, compared to $38,710 in the US.
Gorham said that for countries where investment engagement is high, pension policy has been key. For example in Sweden there is a policy of funded pension promises.
He believes that the recently introduced system of auto-enrolment into workplace pensions in the UK will help raise investment engagement levels, but the RDR will mean advisers will focus on high-net-worth clients leaving a number of ‘orphan clients’.
‘The [orphan client] market will divided into two types; those who go self-directed for the first time and anecdotally the number of people calling in and saying “what is an ISA” is greater,’ said Gorham.
‘But some people will not be able to get over the hurdle to go self-directed and will still need to be advised.’
Gorham hopes that Hargreaves Lansdown will be able to pick up the clients who still want advice but are not profitable for IFAs by introducing a telephone advice service. It is currently looking at how to reduce the minimum asset level for advice from £50,000 to £20,000.
‘We are looking at telephone advice which is more scalable,’ said Gorham. ‘If a client comes along and needs advice, we can give it, but if they want to be self-directed, they can do that too.’
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