Hargreaves Lansdown "playing hardball"

grey_gym_sock

gadgetmind wrote: »

Announcing that would be a suicide note IMO. No way can a platform, which adds no value/advice beyond being an ISA/SIPP wrap, justify 60bps on top of the underlying holdings.

but then why are HL customers paying 60bps now? when they could have switched to cavendish years ago and paid 25bps?

some of us are price-sensitive, especially those us who mostly use trackers. we're likely to face a significant price increase, and to switch. but that's not most of HL's customers.

more transparent pricing will put some downward pressure on prices, but many ppl don't seem to mind high prices.

zagfles

grey_gym_sock wrote: »

but then why are HL customers paying 60bps now? when they could have switched to cavendish years ago and paid 25bps?

Because as mentioned above, HL can be better value than Cavendish and the like for smaller SIPPs (under maybe £100k) even with 60bps charges on the funds, due to lower fixed charges.

Rollinghome

grey_gym_sock wrote: »

but then why are HL customers paying 60bps now? when they could have switched to cavendish years ago and paid 25bps?

Probably because most of them just aren't aware of how much HL is extracting from their investments, because HL hadn't previously been required to say, or how much that impacts returns. The whole point of RDR2 is to remove the smoke and mirrors and rectify that situation.

You can see the extent of the problem from posts on various sites such as ThisIsMoney where gullible investors still earnestly declare that HL are a "discount platform". Much of the confusion could be blamed on professional commentators too with suggestions that HL give bonuses up to 0.5%, when in reality the average is just a fraction of that.

I wouldn't underestimate HL's ability to find other ways to confuse the punters, certainly in the short term, and especially if they're able to massage the headline figure in some way. Longer term I'd be more hopeful because otherwise RDR2 will have largely failed.

As for SIPPs I don't know what proportion of clients will have SIPPs with them but would expect it to be small, and even for them it's unlikely to justify paying hugely inflated fees for other investments with them.

bowlhead99

Rollinghome wrote: »

Shareholders of HL like yourself will obviously hope they can maintain their margins but their marketing will need to be at it's best to sell the idea of "Waitrose pricing" rather than optimum returns.

Their marketing has always been pretty good though:

- they have a bells and whistles website;
- keep sending you a huge amount of paper through the post if you ever accidentally get on their mailing list;
- put themselves out there in the media all the time to drum it in to everyones heads that they are the biggest (i.e. the loads of other customers who trust them can't be wrong!) and have lots of expertise and so can see everything going on in the market;
- and are helping investors make the right choices with all the 'free' commentary they helpfully give on the wealth 150 etc (which is really just disguised paid editorial);
- they reduce nearly all of those nasty initial charges to nothing, and reward you with their 'loyalty bonus' etc which gets bigger the longer you stay with them!

It will be a harder sell when the loyalty bonus has to disappear and there are no initial fees from anyone for them to then very kindly 'negotiate away on your behalf'.

It would be interesting if for their marketing they do try and keep some kind of 'bonus' by just charging everyone a high fee with some kind of kickback every so often if you have a bigger account or are a longstanding customer. At the moment, they like to be seen to 'give you' something special to reward you for using them and obviously any percentage-based charge needs to be tiered to avoid squeezing out large customers anyway.

At the moment say you have an account with: £40k of shares/trusts/etfs ; £40k clean funds (8 individual holdings of say 5k each); £40k dirty priced funds - total £120k.

On the 40k of shares, you pay 0.5% (£200) excluding dealing charges (which themselves are top end for an execution-only service);

On the 40k clean funds you pay 0.48% (£2 pm x 12 months x 8 funds =£192);

On the 40k dirty funds you pay them 0.5%+ (£200+);

Example of the latter, you can see on their highly promoted "loyalty bonus" page: Inv Perp High Income they kindly pay you 0.25% back from your 1.5% AMC and tell you that with 'savings' like that, someone with a £50k pot will 'save' over £1.6k when those savings are compounded over 10 years; but they omit to tell you that in 2014 most other providers are now giving you the clean class at 0.75% AMC and some smaller nominal platform fee leaving you much better off saying goodbye to HL.

Obviously not everyone does hold portfolios like that. Holding individual shares/trusts/etfs gets cheaper if you have a lot more of them, because that charge caps out. Holding clean funds gets cheaper too, if you have large holdings rather than large number of holdings because the flat fees don't get bigger. But basically if you had a portfolio constructed like that, you would be paying ~0.5% on everything - whether clean funds, dirty funds, shares, etc. - for a total of £600+. Just for the platform, ignoring dealing fees on your shares and inv trusts, and underlying management fees on your inv trusts and funds. This is very much Waitrose-end pricing and it has been working for them OK.

But the challenge they have that someone like Waitrose doesn't have, is that Waitrose are not predominantly selling mainstream third-party brands with very publicly known RRPs and the price already marked at £1.99 on the label, that they try to sell for £2.49. With a smiley customer service team and a chav-free store environment, I'm sure many are happy to pay £2.49 for ketchup that costs less elsewhere ; especially if they are popping in the store anway for £3.99 worth of sweet and crunchy shallots because Nigella's book or Jamie's TV show said use those, rather than 60p of mild onions from your greengrocer.

But if they had to quote the RRPs at the point of sale, some customers would blindly carry on regardless but some would be deterred because they don't like the store environment enough to compensate them for the extreme prices. The advantage they've had for the last several years is that OEIC / UT products have had high RRP initial charges and high RRP ongoing charges, but no savvy end customer ever pays them, but many customers are not savvy and will be attracted to a service that looks very slick and premium while touting its discounts against the crazy high RRPs.

Now the RRPs have come down to sensible clean levels they would have to work incredibly hard to sell RRP plus 0.5% pa as being a cheap, discounted service. Selling a slick service at a claimed discounted price is an attractive proposition, particularly to people who don't have the time or inclination to shop around properly; while selling a slick service for an obviously high price will clearly have a different set of challenges. And while someone with 20k of account balance might still think 0.5% is fine, the presumably more experienced 100k customer would stand to make £££ by shopping around and a lot of them will do it if HL don't secure some exclusive pricing that makes it competitive to stay.

Grey Gym Sock notes that margins can go down a bit with profits going up as long as assets under management goes up enough. This is true, and assets can of course go up with the markets even if you have smaller customers leaving you and no net new money coming in at all. And it's probably wrong of us to extrapolate the views of 'money saving experts' such as ourselves who all think £600 on £120k is a lot, over the general population.

Presumably there are many customers who have given them £100-500k+ to look after, and are happy with the service and the current price. And those same customers would be happy paying three quid for a bag of salad at Waitrose that's basically a 50p lettuce that's been rinsed and ripped into bits so it goes brown 24 hrs after the bag is opened. Horses for courses.

But there is a core of people (some on this site) whose 500k contains a lot of clean funds at £2pm platform fees and are not paying 'dirty fund' rates on the whole half million. If as part of removing product bias they were made to pay something like that 0.5%+ for an ongoing custody service with no advice (no, Investment Times on your doormat every month does not constitute exclusive, valuable, independent research despite its claims), they would be out of the door.

pip895

One important thing to remember is that many people moving to HL were previously paying (pre RDR) IFA's and getting no rebate and an initial charge of up to 5%!!! - So to many they looked cheep.

dunstonh

but then why are HL customers paying 60bps now? when they could have switched to cavendish years ago and paid 25bps?

HL have been very successful in getting people to believe they are low cost. We have seen it on this board a number of times where people admit they have fallen for it. One crazy example was the person in the pension section who transferred out of an Aegon pension in an internal fund of 0.4% TER to move to HL at over 1.8% TER. They thought HL was cheaper. It also turned out they used the HL MM fund and that had performed worse than the Aegon one (just to rub salt into the wound). They have marketing power that others have not. Perception and reality are often very different.

and can get some funds for 0.25% cheaper than some other platforms can

That is what they want. They may get it on some. However, the difference is unlikely to 0.25%. As others will have a version of superclean that may be 0.2% or whatever.

I can see some superclean being 0.25% cheaper than clean. The fund houses have built margin into clean to allow superclean. The fund houses will look at bringing in the most new business and offer pricing accordingly. The biggest distributors will get the best pricing. I know work has been going on with some networks on the IFA side and that has found that IFAs actually recommend broadly similar funds. I don't know how that would compare with the DIY world. Inexperienced investors dont know the brand names and maybe (and I really dont know) there isnt the same concentration that you see with intermediaries.

One other thing is has been going on across the board is negotiations on pricing and those that are willing to offer some form of reduction tend to want to their competitors to not be included on a panel or for the competitor not to have special pricing to give them a clear advantage. The more restricted an offering, the better the terms typically (assuming big enough distribution). So, one possibility is to reduce the range and promote certain funds and promote less funds than you did in the past.

One important thing to remember is that many people moving to HL were previously paying (pre RDR) IFA's and getting no rebate and an initial charge of up to 5%!!! - So to many they looked cheep.

Whilst it was certainly cheaper, the size of the rebate is typically quite small (0.1-0.2%) and the FSA ran multiple reviews of initial charges and updated the data every 6 months and the average initial charge via intermediaries was 1.8%. A long way from that 5.5%. Obviously, exceptions apply but 5.5% is a very very long time ago for the mainstream.

jimjames

dunstonh wrote: »

HL have been very successful in getting people to believe they are low cost.

I think the problem is that they WERE low cost. When the standard was 5% initial charge and no rebates by any provider dealing direct, having someone come in offering no IC and 0.25% back was a big change and money saver for a lot of people which shook up parts of the industry for DIY.

Unfortunately it seems they have now become greedy and got used to the old ways where they have lost that competitive edge they once had. If they can find a way to regain that then they may attract back customers they lost and actually increase revenue despite dropping their charges.

If they don't regain that then I can see a mass exodus to cheaper platforms which would be a shame as I do like the tools and functionality of their website but not enough to pay a massive premium for.

dunstonh wrote: »

Whilst it was certainly cheaper, the size of the rebate is typically quite small (0.1-0.2%) and the FSA ran multiple reviews of initial charges and updated the data every 6 months and the average initial charge via intermediaries was 1.8%. A long way from that 5.5%. Obviously, exceptions apply but 5.5% is a very very long time ago for the mainstream.

Last time I looked if you went direct to a fund manager you were still being charged the full IC. That may have now changed but certainly the situation when I first went to HL was a refreshing change from being ripped off elsewhere. They may not have been the cheapest but they were much cheaper than some other offerings at the time.

EDIT - just checked Invesco and they still charge IC of 3% (generously giving a discount of 2% given from the normal 5%)

dunstonh

Last time I looked if you went direct to a fund manager you were still being charged the full IC. That may have now changed but certainly the situation when I first went to HL was a refreshing change from being ripped off elsewhere. They may not have been the cheapest but they were much cheaper than some other offerings at the time.

EDIT - just checked Invesco and they still charge IC of 3% (generously giving a discount of 2% given from the normal 5%)

Going direct to fund house is typically the most expensive way. However, pip895 was indicating IFAs and not fund houses (even IFAs using fund houses got discounts based on their negotiated terms - negotiated terms not being a new thing)

bigadaj

I wonder what the split of hl clients actually is.

Could there not be a scenario where hl manage to blag through their fees on the basis of enhanced quality, service levels etc

They would lose many of the more price sensitive and astute investors, but in doing so they may also be removing those individuals who are taking advantage of the cheap trackers and so potentially reducing their average margin.

There are risks in this approach but they could maintain margins from naive and inexperienced investors.

dunstonh

They would lose many of the more price sensitive and astute investors, but in doing so they may also be removing those individuals who are taking advantage of the cheap trackers and so potentially reducing their average margin.

That may well appease shareholders. By losing say 20% of mostly unprofitable accounts it could offset the lower income obtained on the 80% but retain an overall profit margin.