Hargreaves puzzler

jaybeetoo

From The Times today:

Hargreaves puzzler
One lesson from the Woodford debacle: investment trusts are a far “superior structure for holding illiquid securities”, as JP Morgan Cazenove puts it. They don’t come with the risk of open-ended funds: namely that managers could be forced to sell shares to meet redemptions in the sort of death spiral that forced the shuttering of the Woodford fund.

So, here’s a puzzler. How many of Hargreaves Lansdown’s Wealth 50 list marketed to retail punters are investment trusts rather than open-ended funds? That’s right: none of them. Hargreaves says “it’s because trusts would not be able to process the volumes associated with the list”. But what about a different reason? That Hargreaves charges no “platform fee” for investment trusts in its standard account, a maximum £45 for those in an Isa and £200 for ones in a self-invested personal pension. Contrast the funds, where Hargreaves charges 0.45 per cent on the first £250,000 investment: a far bigger money-spinner.

ColdIron

Prior to the Retail Distribution Review there was no way of extracting commission or kickbacks from ITs (or ETFs) as they were exchange traded. HL were hardly alone in pushing funds, most platforms and IFAs did the same. With explicit charges things may change but there is still inertia. There is also an argument that ITs and ETFs require more understanding of the additional risks that they carry, funds are simpler to retail. While I'm not going out to bat for them, this issue is much wider than HL alone

dunstonh

One lesson from the Woodford debacle: investment trusts are a far “superior structure for holding illiquid securities”, as JP Morgan Cazenove puts it. They don’t come with the risk of open-ended funds: namely that managers could be forced to sell shares to meet redemptions in the sort of death spiral that forced the shuttering of the Woodford fund.

That is not a lesson from Woodford. That is pretty much investing 123.

How many of Hargreaves Lansdown’s Wealth 50 list marketed to retail punters are investment trusts rather than open-ended funds?

Perhaps its better to look at it differently.

If you were a platform where most of your customers are low knowledge and you wanted to have marketing list of funds to encourage low knowledge investors to use would you be picking investment trusts? No.

You would use UT/OEICs as there are generally better for low knowledge consumers. You would also stick to the mainstream and not include any fund that has more than 5% in undisclosed assets or illiquid assets.

That is not hindsight talking. It is the expectation that exists on the advice side. Whilst a marketing list is not advice, you would be foolish to not follow the benchmarks expected with advice. Especially when you know that many of these low knowledge investors think the marketing list is actually a recommended list. The FOS uphold complaints on the advice side where there are high weightings of undisclosed assets or illiquid assets. So, its a known issue and has been for years. Indeed, most of the IFA due diligence suppliers had removed Woodford Income years ago (usually putting income focus in its place). Here is a copy and paste of the summary on our supplier in 2017: [it has] the long tail of illiquid unquoted companies, which we believe are not consistent with the aims of an income-focused fund."

That Hargreaves charges no “platform fee” for investment trusts in its standard account, a maximum £45 for those in an Isa and £200 for ones in a self-invested personal pension. Contrast the funds, where Hargreaves charges 0.45 per cent on the first £250,000 investment: a far bigger money-spinner.

Yes, that is not good. RDR was meant to remove the bias between investment universes by unbundling all types of investment. The idea being that the platform charge would be the same regardless of what asset type you would use (exceptions being things that cannot be avoided, such as dealing costs). The vast majority of platforms are single priced regardless of asset. So, no bias exists. However, there are a few like HL that do have a bias on different asset types.

I said on one of the other threads that the Woodford issue is probably the first high profile case where RDR and MIFIDII actually show the benefit of removing marketing and potential bias from the advice side. Had RDR and MIFIDII not taken place, I suspect Woodford would have been on the IFA lists as well. Non-advised cannot pay to play any more but operating a position that only got you on the marketing list if you gave a superclean share price which helps keep the platform charge higher than it would be otherwise.....

Maybe it is time to remove such bias on non-advised side.

Albermarle

The vast majority of platforms are single priced regardless of asset. So, no bias exists. However, there are a few like HL that do have a bias on different asset types.

At least two of the better known/larger SIPP providers operate in a similar way to HL:
Al Bell have a max £100 charge for IT's; ETF's etc and Fidelity have a max charge of £45 ( outside of an ISA/SIPP, they do not charge at all) . Apart from previous comments how do they actually make any profit in this area, maybe via the dealing charges I guess.

Neither include any IT's in their Top 50 type lists either.

Malthusian

Hargreaves Lansdown effectively receives commission from funds like Woodford. Funds have a shareclass specially for HL (or sometimes other platforms that get the special deal) which have a lower annual management charge. These discounts allow Hargreaves Lansdown to charge a significantly higher platform fee than its competitors.

Effectively therefore HL gets a slice of Woodford's annual management charge.

When a fund like Woodford is in the news and investors are flooding in waving banknotes, a large proportion of them will go via HL, thanks to combined marketing efforts and the fact they are told they get a discounted fee by going via HL (even though this is cancelled out by HL's higher platform fees).

HL gets a cut of the management fee that Woodford would normally charge and as a result it alters both parties' behaviour. HL puts Woodford on its buy list, Woodford launches as an OEIC rather than an investment trust despite its intention to hold unlisted securities. Because if it was an investment trust, HL wouldn't get 0.45% comm (except for relatively small holdings). This is old-fashioned commission in absolutely everything but name.

Hilariously, these special-deal shareclasses are known as "superclean", despite the fact that superclean shareclasses effectively pay commission. The original meaning of a "clean shareclass" was that it didn't pay commission to platforms whereas a "dirty" (less colloquially "bundled") one did. The "superclean" label turns this on its head.

Malthusian

Albermarle wrote: »

Al Bell have a max £100 charge for IT's; ETF's etc and Fidelity have a max charge of £45 ( outside of an ISA/SIPP, they do not charge at all). Apart from previous comments how do they actually make any profit in this area, maybe via the dealing charges I guess.

Correct. People who hold individual shares tend to churn them more often than people with funds. Even when those individual shares are actually ETFs and ITs, and in theory, you could build a diversified portfolio out of them and leave them untouched for years, leaving your platform to adminster your account virtually for free.

OEICs are, other things equal, lower-risk than equivalent ETFs and ITs due to restrictions on gearing, restrictions on stock lending, lack of a premium/discount, etc. And often lower-charging as well. In general OEICs should be used unless there is a specific reason to use an ETF instead.

ETFs are preferred by short-term traders who like the fact they can be traded instantly whereas OEICs use forward pricing. Therefore if you have an investor who prefers ETFs there is a good chance they are going to pay lots of dealing fees. If lots of investors bought broad-based index ETFs and held them indefinitely, these platforms would have to change their charging structure, but as only a few of them do, it's not a problem if you have a few accounts who make almost no money. You make it up on those who do pay lots of dealing fees.

Many ETFs are weird and wonderful and not designed to be held for the long term. Nobody is going to hold the ETFLOL 2x Inverse Leveraged Chinese Hemp Oil ETF for very long without paying another dealing charge on it.

Odds are good that even if someone is holding the SPDR FTSE All-Share ETF, they're betting on some Brexit news they think will be coming out that day and will sell it in their lunch hour.

This kind of charging structure is not available via advised platforms. This is because they would get too many IFAs recommending a diverse portfolio of ETFs which would be churned very rarely and cost the platform money. In the DIY sector, however, you can get away with it, because only a small minority of investors are savvy enough to play the charging structure in this way.

Albermarle

Thanks for the explanation .

If you have a few different pensions/ISA's etc it would seem a good idea generally to hold some investment trusts long term ( although theoretically more risky than funds , some seem to have a very solid track record for both growth and defensive purposes) In this case I presume it would make sense to hold all your IT's in one of the platforms with this fee cap, and pay virtually nothing as an annual charge, apart from the initial dealing and stamp duty charges.

redux

Another puzzler, or not in the quote in the OP anyway, is why so many own house investment trust savings schemes that close recently are going to HL as recommended, given that it does such feeble or nil promotion of investment trusts as a concept.

Yes, some of the fees aren't bad, and at least one house has had them waived to begin with, so when 2 schemes suggested HL 3 and a bit years ago I went with it, costing me £3 to £5 a year for reinvesting dividends.

Does HL have sales staff knocking on the door of Jupiter, RIT Capital Partners, Witan, Baillie Gifford, JP Morgan, and others I've forgotten or don't know, and if so why, or is it pure coincidence?

Reaper

Malthusian wrote: »

Even when those individual shares are actually ETFs and ITs, and in theory, you could build a diversified portfolio out of them and leave them untouched for years, leaving your platform to adminster your account virtually for free.

That's what I do. At YouInvest people can invest in ETFs, IT, Bonds and gilts and only pay a capped £100pa. Bargain.

ColdIron

Albermarle wrote: »

In this case I presume it would make sense to hold all your IT's in one of the platforms with this fee cap, and pay virtually nothing as an annual charge, apart from the initial dealing and stamp duty charges.

I have a six figure IT only portfolio with HL in their unwrapped Fund and Share account for which they charge me £0 as there are no annual charges at all. For this they regularly and reliably pay my dividends into my bank account and give me an annual tax certificate. In their ISA they charge 0.45% capped at £45. Both are very good deals and many platforms operate a similar charging structure. You can do the same with ETFs

EdSwippet

ColdIron wrote: »

I have a six figure IT only portfolio with HL in their unwrapped Fund and Share account for which they charge me £0 as there are no annual charges at all. For this they regularly and reliably pay my dividends into my bank account and give me an annual tax certificate. In their ISA they charge 0.45% capped at £45. Both are very good deals and many platforms operate a similar charging structure. You can do the same with ETFs

I have a six figure OEIC and unit trust only portfolio with iWeb. They charge me £0 as there are no annual charges at all. They regularly and reliably pay dividends and give me an annual tax certificate. In their ISA they also charge £0.

It's an excellent deal, and completely sidesteps any need to 'play' the silly charging policy dreamed up by some HL marketing halfwit. :-)