Hargreaves Lansdown uncovered: The true cost of investing
15th January 2014 14:42
by Holly Black from interactive investor
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share price dropped almost 4% on Wednesday even as the platform tried to appeal to its largest investors with a new tiered pricing structure touting attractive headline rates.
From 1 March 2014 investments of up to £250,000 will be subject to an annual management charge (AMC) of 0.45%.
But as investors move up the wealth chain the fee falls to 0.25% per annum for those with between £250,000 and £1 million invested.
Assets over £1 million will be subject to a charge of just 0.1% per year and there will be no fee on assets over £2 million - however all fee tiers up until that point will still stand. So, if you have £2 million with the platform, you will pay 0.45% on the first £250,000, 0.25% on the next £750,000 and 0.1% on the following £1 million.
Alongside the annual management fee, clients will pay an average of 0.65% for investments in HL Wealth 150 funds, which compares with an average across the industry of 0.76%.
Meanwhile W150+ funds (a core list of 27 "favourite" funds) will average a cost of 0.54%, versus a typical 0.70% across the rest of the market.
Multi-manager funds will have an AMC of 0.75% and new "super-low cost" passive funds from L&G and BlackRock will have charges of as little as 0.0%.
No flat fee
The fund supermarket said it will continue not to charge investors outright for an account and would not ask for trading fees.
Additionally, the firm said the average cost for Hargreaves Lansdown clients is set to fall from 1.33% per year to 1.1% - a drop Hargreaves Lansdown said will equate to a fall of £8 million in its revenue in the first year of the new pricing model.
The company will need to gather an additional £3.5 billion of assets over the next three years in order to make up for this revenue loss. In 2013 alone it saw net new business of £5.1 billion.
Much of the industry has taken to Twitter this morning to comment on the long-awaited announcement.
Justin Modray of Candid Money said: "Hargreaves Lansdown deserves some credit for taking the bold step of cutting its margins. It appears the majority of its customers who currently hold commission paying funds will end up better off, broadly by around 0.10% to 0.15% a year, as a result of these forthcoming changes."
"However, many customers will no doubt be shocked to discover the service they have been quietly paying for via opaque sales commission is actually quite expensive in many cases."
Assessing the competition
Initial reaction to the new pricing policy has focused on the fact many investors should pay less, but perhaps the key question should be whether the cost is competitive versus the wider market.
Investors may be best served comparing prices with the rest of the industry rather than looking at them versus the old charges.
If we assume £100,000 invested in a fund that charges 1.50% for the 'retail' version and 0.75% for the 'clean' version, annual ISA costs via several popular investment platforms would be as follows:
| Platform | Annual fund charge | Annual platform charge | Total annual cost | Notes |
|---|---|---|---|---|
| Hargreaves Lansdown (existing) | 1.5% less 0.17% rebate | Nil | £1,330 | |
| Hargreaves Lansdown (from 1 March 2014) | 0.75% | 0.45% | £1.200 | |
| Hargreaves Lansdown (from 1 March 2014) | 0.65% | 0.45% | £1.100 | Assumes fund is a 'super clean' version with 0.10% discount |
| Interactive Investor | 0.75% | £80 | £830 | Platform charge includes eight deals, then £10 per deal |
| Alliance Trust Savings | 0.75% | £90 | £840 | £12.50 fund dealing charge |
| AJ Bell Youinvest | 0.75% | 0.20% (capped at £200 | £950 | £4.95 fund dealing charge |
| Clubfinance (from April 2014) | 0.75% | 0.24% (minimum £120) | £990 | |
| Charles Stanley Direct | 0.75% | 0.25% | £1,000 | |
| Source: www.candidmoney.com | ||||
Rebecca O'Keeffe, head of investment at Interactive Investor, said each investor should do their own research before deciding where to buy a fund.
"The industry is polarising between fixed fee providers and those who continue to charge percentage fees [such as Hargreaves Lansdown]. Depending on the size of your investment, you could be significantly better off with one model versus the other."
Even for Hargreaves Lansdown clients with more than £250,000 invested (whose AMC drops to between 0.25% and 0.1%) a flat fee could prove to be better value, with 0.25% of £250,000 amounting to £625.
Investor view
Over on Interactive Investor's discussion board for Hargreaves Lansdown shares, 'WarrenBaffoon' said: "About time Hargreaves Lansdown came clean. Now all their investors can see how much commission and % of their investments they have been pocketing over the years for giving no advice.
"I can only see one way for their share price and business now and it is not up."
Shares in Hargreaves Lansdown are up 97% over the past year, taking its market cap to £6.8 billion.