With whom to invest a tracker-heavy portfolio?

talexuser

psychic_teabag wrote: »

There's a comparison of discount brokers here : http://www.candidmoney.com/actionplans/actionplan3.aspx

Cavendish do CoFunds too now, which is not mentioned in the table.

jimjames

smallfry27 wrote: »

I found BestInvest worked out cheaper for the trackers I wanted.

Which one was that? I've found Best Invest more expensive as they charge you 0.25% to switch between funds which HL don't do.

Noktok

Thanks for the insightful posts. I initially struggled to understand what Dunston was saying but hopefully I'm starting to get my head around it.

jimjames wrote: »

I can't see any reason why HL is looking less attractive for trackers. If you can find a cheaper platform for funds than HL that is available to retail investors then I'd definitely be interested to hear about it. So far all mention about other platforms has referred to products that are not available to retail investors making their own choices; all seem to be for IFAs only which is of no use to anyone else.

Isn't Cavendish an unbundled platform that's available for retail investors? I might be misunderstanding, but the Cavendish website states that they charge a £25 fee to set up an ISA and then rebate all commission. Isn't that what Dunston is talking about? This would seem to make Cavendish far cheaper since they rebate the full renewal commission on managed funds, compared with H-L's partial rebate, and also they don't levy any additional charges on funds that don't pay renewal commission, which opens up more a lot more choice for cheap index trackers. It sounds too good to be true so there must be a catch!?!

dunstonh wrote: »

When commission ceases on new fund purchases after 2012, unbundled platforms will have to increase charges ... Unbundled platforms wont be affected by that.

If trail commission is disappearing, then unbundled platforms won't be able to pass it on so either way the investor loses out, no?

dunstonh wrote: »

If bundled platforms are banned then the cost of tracker funds will go up via platforms whilst managed funds will come down in cost.

So managed funds would get cheaper because all platforms would be forced to rebate the commission to offset the AMC charges (until 2012 at least?) but what's the rationale behind tracker funds getting more expensive?

dunstonh

Isn't Cavendish an unbundled platform that's available for retail investors?

I think its a bit of a hybrid in that it rebates the trail. However, they still receive the hidden marketing rebates. To be classed as unbundled, they would have to disclose those and offset those against charges rather than keep them.

If trail commission is disappearing, then unbundled platforms won't be able to pass it on so either way the investor loses out, no?

Trail commission is only part of it. There is also the cut that goes to the distributor (platform) and hidden rebates.

So managed funds would get cheaper because all platforms would be forced to rebate the commission to offset the AMC charges (until 2012 at least?) but what's the rationale behind tracker funds getting more expensive?

You can buy a limited range of trackers on most bundled platforms which are mainly there as loss leaders. The platform makes nothing out of them but they are used to draw people in who will mostly use managed funds as well. This allows the likes of HL to marketing their SIPP as low cost despite it in reality costing as much as 5 times more a modern personal pension investing like for like. They use the cheap fund but in reality most dont use it.

In the unbundled world, you see what everything costs and there are no hidden layers of remuneration. So, you have a platform charge, a fund charge and an adviser charge (where one is used).

So, look at at the platform charge of around 0.5% and the tracker fund TER of 0.3% and you have a tracker fund now costing you around 0.8% if you use a platform. If the managed fund costs you 0.65% TER and the platform charge is 0.5% then the managed fund is 1.15%. TER. Not a great difference between the two.

The other thing to remember is that HL doesnt actually rebate that much. Its a small amount on ISAs (typcially 0.1 or 0.2%). The rebate no trail on the SIPP. So, are the shareholders going to accept the loss of an average of say 0.4% on £14 billion?

smallfry27

jimjames wrote: »

Which one was that? I've found Best Invest more expensive as they charge you 0.25% to switch between funds which HL don't do.

Perhaps things have changed since I first did my research, I thought I saw a general extra charge on most trackers through H-L, but can't find it tonight. Frankly I've just taken a dislike to all the H-L self-adverts on their web site, and all the stuff you get through the post. Too much 'sell' puts me off buying.

Regarding switch fee - I don't intend to make a habit of switching funds unless something drastic happens. Normally it will only be small amounts for annual re-balancing. When the dust has settled after the review, we will all have to reappraise our choices.

masonic

dunstonh wrote: »

The other thing to remember is that HL doesnt actually rebate that much. Its a small amount on ISAs (typcially 0.1 or 0.2%). The rebate no trail on the SIPP. So, are the shareholders going to accept the loss of an average of say 0.4% on £14 billion?

My understanding is that HL generally rebate 50% of the trail commission. Several managed funds I hold rebate 0.25%, presumably of 0.5% trail. I guess they'd take a bigger cut when trail commision is lower, so hence some funds don't get much rebate?

What concerns me about this whole situation is that if this trail commission stops, fund houses are just going to spend the money on some other way of promoting their funds, so TERs will stay roughly the same while platform charges will go up.

masonic

smallfry27 wrote: »

Perhaps things have changed since I first did my research, I thought I saw a general extra charge on most trackers through H-L, but can't find it tonight. Frankly I've just taken a dislike to all the H-L self-adverts on their web site, and all the stuff you get through the post. Too much 'sell' puts me off buying.

I'm paying an average TER of 0.31% on the trackers in my portfolio with no extra charges. That's about a third of my overall portfolio, but elsewhere I've chosen managed funds deliberately in most cases. It's true that there are trackers that attract extra charges, but you can avoid them and still get quite good coverage. As far as HL and advertising goes, you can opt out from their junk mail, and just go directly to the login page to their website - there's no need to do your research there.

dunstonh

My understanding is that HL generally rebate 50% of the trail commission. Several managed funds I hold rebate 0.25%, presumably of 0.5% trail. I guess they'd take a bigger cut when trail commision is lower, so hence some funds don't get much rebate?

I checked a number of funds recently that paid 0.5% and found the rebates were just 0.1% and 0.2%. Not enough to be classed as suitable sample but with HL being the kings of marketing, I wouldnt be surprised if reality and perception are different.

What concerns me about this whole situation is that if this trail commission stops, fund houses are just going to spend the money on some other way of promoting their funds, so TERs will stay roughly the same while platform charges will go up.

They already do. Look at all the money that is paid to bundled platforms that you dont know about. HL have already said that they expect the fund houses to keep paying them the IFA cut even when trail commission stops. HL are not the biggest platform so you can expect the likes of Skandia and Cofunds to be there with that as well. However, that really makes a mockery out of RDR as one of the objectives is to remove commissions and hidden payments and make it all transparent.

masonic

dunstonh wrote: »

I checked a number of funds recently that paid 0.5% and found the rebates were just 0.1% and 0.2%. Not enough to be classed as suitable sample but with HL being the kings of marketing, I wouldnt be surprised if reality and perception are different.

I had a flick through their performance and discount tables and it makes interesting reading. In some sectors you can hardly avoid 0.25% (and if you do it's because they're rebating 0.375%), but in others you're lucky to get anything at all, but if you do it's 0.1% or 0.15%. It seems to correlate somewhat with risk, but it could also be the sectors they like to make recommendations from (though absolute return is particularly bad and HL can't sing that sector's praises high enough). I seem to have done quite well at cherry-picking the better examples, though I hadn't paid much attention to such minor details when picking funds.

Noktok

I've looked at the key features for Hargreaves Lansdown, Cavendish and BestInvest and compared a small sample of funds they offer. These are my summarized conclusions:

• HL is most expensive for trackers due to it's 0.5% extra charge, and therefore limited to a small range of HSBC trackers.
• BI is cheapest for trackers but most expensive for managed funds due to lack of trail rebate.
• CV apperars to be cheapest for managed funds due to full trail rebate but some funds may have a higher initial charge than either HL or BI (e.g. Aberdeen Emerging Markets, 0.25% initial charge versus 0% from competitors)
• HL is cheapest for portfolio rebalancing as there is no switching fee, unlike 0.25% switching fee from both CV and BI.
• BI is the only one to offer free advice (on portfolios worth over £50k) which personally I'm not likely to use.
• HL and BI both offer polished websites with their own fund research tools. CV website appears to be simpler and more no-frills.

Based on my conclusions, I was tempted to open two ISAs (for my spouse and I) with two different providers; an HL account for managed funds and BI account for trackers. I may be over-analysing, considering that the commission model is likely to change in a couple of years. Also I'm not convinced that it's easy to make a balanced portfolio consisting of nothing but trackers given the range that exists out there, but it might be possible for me to create a good balance of trackers and active funds spread across both portfolios.

Comments and corrections welcome.