Hargreaves Lansdown to introduce annual fee
Discount investment broker Hargreaves Lansdown has announced that it will start charging an annual account fee from March 2014.
The majority of its customers – those with accounts worth up to £250,000 – will pay a fee equivalent to 0.45% of their holdings, while wealthier clients with accounts between £250,000 and £1m will pay 0.25% a year.
Despite the introduction of the new fee, Hargreaves Lansdown claims the majority of its account holders will pay less for their investments because they have negotiated additional discounts to the annual management charges (AMCs) levied by fund managers.
The company says that from March the average AMC paid by investors will be around 0.65%, which compares to a market average of 0.76% for the same funds. An estimated 27 funds within its "Wealth 150" list of recommended funds will enjoy even lower charges of 0.54%.
Until now, it has been difficult to see how much Hargreaves Lansdown customers have been paying for their investments. Although the broker didn't charge any direct fees, it was taking a large slice of the investor's AMC in the shape of commission. This is money that many of Hargreaves Lansdown's rival providers were returning to investors by way of fund rebates. So while Hargreaves' customers weren't paying any fees, they were, effectively, paying higher annual management charges.
Justin Modray, founder of Candid Money, said that while most customers will pay the same or less under the new regime, they may be shocked to realise that a service they had been paying for via an "opaque sales commission" is actually quite expensive.
He continued: "One of the keys to Hargreaves Lansdown justifying an annual platform fee of double or more than some of its rivals on the first £250,000 invested is the promise of lower fund charges than its competitors. Although debatable whether the firm could retain any exclusive deals for long, this is important to avoid Hargreaves looking excessively expensive versus lower cost rivals, especially on larger sums."
Modray also said that the reductions to certain AMCs within Hargreaves Lansdown's Wealth 150 led him to question the integrity of its recommended funds.
"The firm says that 70% of the Wealth 150 funds will have additional charge discounts, but we can only hope that the discounts extend well beyond the Wealth 150 list, otherwise lower charges on around 63 funds from a universe of more than 2,000 would be a monumental damp squib and suggest the Wealth 150 list is more commercial negotiating tool than a serious research process."
The changes being imposed by Hargreaves are the result of the Retail Distribution Review, which is banning the payment of commission on the sale of funds to make it easier for investors to compare fees. As a result investment platforms have been in the process of restructuring their charges. Most now charge an account or platform fee and either rebate commission via the retail shares, or sell so-called 'clean shares', which have a lower AMC that does not include the payment of commission.
Rebecca O' Keeffe, head of investment at Interactive Investor, said that in this new world, investors must do their research and compare their options to ensure they don't pay more than necessary. "The industry is polarising between fixed fee providers and those who continue to charge percentage fees. Depending on the size of your investment, you could be significantly better off with one model versus the other."
She added: "Investors need to make sure that not only are they deciding which fund to invest in, but are also making an active choice of where best to buy that fund, to make sure they really are maximising their investment."
From March 2014, an investor with £100,000 invested in a fund that charges 1.5%, (or 0.75% for the 'clean' version) would pay £1,200 in total annual fees with Hargreaves Lansdown, according to Candid Money. This compares to £830 with Interactive Investor, £840 with Alliance Trust Savings, £950 with AJ Bell, and £1,000 with Charles Stanley Direct.
However in seperate research from financial analyst, The Lang Cat, it emerged that on a smaller £5,000 portfolio, Charles Stanley Direct was the cheapest at £12.50 a year but Hargreaves was next cheapest at £22.50. Interactive Investor would cost £100 a year, The Share Centre £132.50 and Alliance Trust Savings the most expensive at £215. This analysis was based on an investor that bought five funds and sold five funds each year, the results could be very different for investors with a buy and hold strategy.