Cheapest Sipp: build yourself a low cost DIY pension article

Linton

gadgetmind wrote: »

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The good thing to come from all of this is that when the *real* fees are visible, people can change supplied to minimise these fees. It may take a year or so for real competition to emerge, but we're already seeing signs of it starting to happen.

This industry is going to have to start *really* tightening its belt in future and accept that 65%+ profit margins can't last.

I am sure you are right but I fear it could be a case of "be careful what you wish for". Look forward 10 years when we all log into the global AmazonMoney platform as the economies of scale have made anything smaller nonviable.

gadgetmind

dunstonh wrote: »

Why should a low cost option be offered? Wouldnt that introduce bias (the very thing that there shouldnt be?

HL have decided to change their terms and conditions. I intend to reject these changes and leave the platform, however, their exit fees are a barrier to me doing this. The view of the FOS is that exit fees should *not* be be used to trap unwilling customers and should be waived when new terms have been imposed that those customers do not find acceptable.

HL have been told this several times, but seem to require the lesson repeating on a case-by-case basis. If that's how they choose to play it, then I'll play by those rules.

The FCA mandated the changes. HL chose their charges. HL have come in expensive and with a wide range. Nobody can argue that (apart from perhaps HL!)

I intend to lay out my case for complaint, give them a chance to react, and then escalate via the formal processes if required.

gadgetmind

Linton wrote: »

Look forward 10 years when we all log into the global AmazonMoney platform as the economies of scale have made anything smaller nonviable.

I think there is plenty of room for a number of "lean and mean" players but perhaps not for overly-greedy lumbering giants.

mikebeaches

Algie wrote: »

My HL SIPP charges are going from £24 to approx £1750 pa in March. I am moving to AJ Bell Youinvest where the charges are capped. They aren't the cheapest option out there, but I have my ISA investments with them and have been happy with their service so far. I will, however, be keeping an eye out in case they raise their charges too!

Wow, and I thought I was being hit hard with an increase to £500pa! That is tough Algie.

I'm just casting around at the moment. My wife and I have had investments at the Share Centre for over 20 years and think they provide a good service at a good price.

I went off managed funds decades ago. Yes, obviously a few periodically beat the market, but in my opinion few can demonstrate consistently doing it over a 20-30 year period or more.

In general I much prefer investing in individual shares, but the All Share tracker proved a handy complement to my savings.

I will probably buy some shares to put in a SIPP at the Share Centre, but haven't finally made up my mind.

armageden

My understanding of Tracker funds was that they undercut Active Funds because of their Computer Programmed index Tracking Methods which greatly reduced human fund management costs.
With this in mind , why is there reference to cross subsidy when Tracker Fund costs were supposed to reflect fund expenditure.
One could be forgiven for thinking this cross subsidy argument comes from an HL origin !.

grey_gym_sock

the fund management costs for trackers (excluding a few over-priced ones) are genuinely lower than for actively managed funds.

however, the charges for holding tracker funds on a platform have until now generally been lower than for holding actively managed funds. this has been a cross-subsidy, because the costs to the platform are the same for either kind of fund.

e.g. an active fund with a AMC of 1.5% might have been paying 0.75% of that to a platform, who rebates c. 0.25-0.5% to the customer. so the platform's net charge has been c. 0.25-0.5%.

meanwhile, a passive fund might have had an AMC of 0.25%, of which it was paying 0.1% to the platform. the platform keeps the 0.1%, but often didn't charge anything on top of that, so that's its net charge - much less than for an active fund.

in the post-RDR2 world, there is no commission to be paid from the fund's AMC to the platform. the fund AMC reduces to (say) 0.75% for active funds, 0.15% for passive. and the platform has an explicit charge on top of that (which is the same for active and passive).

since most platforms are charging at least 0.25%, the total cost has risen for holding a passive fund. but is still significantly less than for active.

cjno1

dunstonh wrote: »

No. It is to remove the cross subsidy and bias you have benefitted from.



Yes they are. All those that were taking advantage of the cross subsidy and bias as you were.

This isn't entirely true, there can still be cross-subsidies, you just need to be explicit about how much of your fees are for the platform and how much are for the investment. But it doesn't mean you can't cross subsidise platform costs across customers. Many platform providers won't make money from every single customer, they will make more from one group and use this to cover losses on another. I work for a platform provider and we make a loss on any customer who has less than a certain amount of assets, but that's more than offset by the charges we take on our bigger customers. This will not change after April 2014.

dunstonh

This isn't entirely true, there can still be cross-subsidies, you just need to be explicit about how much of your fees are for the platform and how much are for the investment.

I never said there cannot be cross subsidy. However, if that cross subsidy creates a bias then there cannot be. i.e. using commissions from managed funds to cross subsidise lower charges given to index trackers is a bias. The charges for both at platform level should be the same.

I work for a platform provider and we make a loss on any customer who has less than a certain amount of assets, but that's more than offset by the charges we take on our bigger customers. This will not change after April 2014.

Common scenario. Although post platform review, some platforms have chosen to close that margin of loss somewhat.

mikebeaches

grey_gym_sock wrote: »

the fund management costs for trackers (excluding a few over-priced ones) are genuinely lower than for actively managed funds.

however, the charges for holding tracker funds on a platform have until now generally been lower than for holding actively managed funds. this has been a cross-subsidy, because the costs to the platform are the same for either kind of fund.

e.g. an active fund with a AMC of 1.5% might have been paying 0.75% of that to a platform, who rebates c. 0.25-0.5% to the customer. so the platform's net charge has been c. 0.25-0.5%.

meanwhile, a passive fund might have had an AMC of 0.25%, of which it was paying 0.1% to the platform. the platform keeps the 0.1%, but often didn't charge anything on top of that, so that's its net charge - much less than for an active fund.

in the post-RDR2 world, there is no commission to be paid from the fund's AMC to the platform. the fund AMC reduces to (say) 0.75% for active funds, 0.15% for passive. and the platform has an explicit charge on top of that (which is the same for active and passive).

since most platforms are charging at least 0.25%, the total cost has risen for holding a passive fund. but is still significantly less than for active.

So if as suggested, HL has been cross-subsidising those accounts with passive funds, is that an ethical way to do business with people's pensions?

Has it been fair to customers with managed funds?

Has it been fair to reel in thousands of additional customers with passive funds by treating their business as a loss leader?

And under the new regime, how do HL's actual costs relate directly as a percentage of the size of the funds held? Does it cost one hundred times more to administer a single fund in a single account containing £100k than it does one containing £1k?

You mention that "most platforms are charging at least 0.25%". I agree that some are - which in my opinion is no less arcane than HL's new fee structure - but there are plenty of others that have either a flat administration charge, or a capped charge.

Indeed, in a number of areas HL is proposing to apply a cap. But not on the cost of administering a low-cost tracker in a SIPP - why? I can only presume because HL and the industry is concerned it was becoming too attractive for customers.

grey_gym_sock

mikebeaches wrote: »

So if as suggested, HL has been cross-subsidising those accounts with passive funds, is that an ethical way to do business with people's pensions?

Has it been fair to customers with managed funds?

Has it been fair to reel in thousands of additional customers with passive funds by treating their business as a loss leader?

no, it hasn't. i'm pleased that RDR2 is sweeping these practices (which aren't unique to HL) away.

And under the new regime, how do HL's actual costs relate directly as a percentage of the size of the funds held? Does it cost one hundred times more to administer a single fund in a single account containing £100k than it does one containing £1k?

of course not. costs may on average be a bit higher for larger investment pots, but nothing like proportionately.

there are also costs in dealing funds, as well as in holding them, so it is also odd to make dealing in funds free.

but not everybody is charging the same way. it's all more transparent, and you can switch to a provider whose approach to charging suits you.

You mention that "most platforms are charging at least 0.25%". I agree that some are - which in my opinion is no less arcane than HL's new fee structure - but there are plenty of others that have either a flat administration charge, or a capped charge.

Indeed, in a number of areas HL is proposing to apply a cap. But not on the cost of administering a low-cost tracker in a SIPP - why? I can only presume because HL and the industry is concerned it was becoming too attractive for customers.

why should there be a cap on trackers specifically? handling them costs the same to HL as other funds.

for funds in general, HL are not capping the charges (or rather, not until a very high level). clearly they are going for something that gives them similar revenue from funds to the old hidden commissions. though they are giving up a little bit of margin now, and will have to give up more in future.

but if it's too expensive for your funds, move them to somebody else. that's what i'll do with mine.