There’s no such thing as a free lunch, or so the saying goes. Equally, there’s no such thing as a free investing service as around 500,000 Hargreaves Lansdown customers were reminded this week when the firm announced a raft of new charges.
On the face of it, the service offered by the firm had, until now, looked free. There were no set up charges and no fees to buy funds. Only those investors who wanted to buy shares had to pay dealing fees. However, the discount broker did not become a FTSE 100 company by providing its services for free. Like many of its peers, Hargreaves had been earning a commission on the funds it sold, which was paid for by the investor out of the annual management charge (AMC).
The city regulator, however, has never been a fan of commission and through its Retail Distribution Review is cracking down – first it banned commission payments to financial advisers, now it is going through the process of banning fund managers from paying commission to the investment platforms that sell their products direct to consumers. That ban will finally come into force in April this year. Hence Hargreaves’ new pricing structure.
Personal finance journalists jumped on the announcement and set about breaking down the charges, seeing how they compared with those platforms that already charge a fixed fee. In return for these fees, they either rebate commission or only sell so-called ‘clean’ shares with lower annual management charges that don’t include commission.
However, there has been less attention on another aspect of Hargreaves’ new pricing structure, which I reckon is a bit more controversial. In order to justify its new 0.45% charge – which doesn’t compare well with the 0.25% Charles Stanley Direct charges its investors with the same size portfolio – Hargreaves is introducing what have been termed ‘super clean’ shares with even lower annual management charges that it has managed to negotiate with fund managers on behalf of its clients.
It says the average AMC for a fund in its Wealth 150 list of recommended funds will be 0.65% from March, compared to an industry wide average of 0.76%. Bigger discounts have been negotiated on 27 funds within this list, which will have average AMCs of 0.54%, compared to a market average of 0.70%.
Theoretically I’m in favour of anything that reduces the cost of investing, but I’m uncomfortable with these changes for a number of reasons.
For starters there is a very real chance that the discounts will simply encourage investors to buy the cheapest funds, rather than doing their research to select the right one for them. Fund selection will be commoditised and come down to cost, rather than performance, risk, strategy and manager expertise. And what will determine which funds have the biggest discounts – the willingness of the investment managers to negotiate, or the quality of the funds themselves?
Then there is the fact that the whole reason the regulator banned commission was to make it easier for consumers to compare the cost of investing and remove any bias from the sale of investment products.
Introducing a system where one platform sells funds at a different price to another only makes it more difficult for the average investor to compare costs. As far as I can see the shares in the funds won’t be ‘super clean’, they’ll be as muddy and murky as the shares the regulator sought to ban.