SiPP charges and ETF’s

Madeinireland

Why do HL and others cap charges for the likes of shares and ETF funds compared with other funds? Are they cheaper for them to manage or something.

I would like to use Vanguard Lifestrategy funds but it seems they are not capped so I’m currently thinking of using VL funds for my ISA and just ETF’s (world stock market and bonds split) for my SIPP. Any issues with that approach I should be aware of?

Thanks...

bowlhead99

Exchange traded funds, investment trusts and individual company shares are bought and sold by a stockbroker on a stock exchange. Any chump in his potting shed with electronic access to the CREST settlements system can do it.

Unless you are looking for the shares to be held in a tax-advantaged product such as ISA (requiring ongoing reporting to HMRC) or SIPP (requiring ongoing reporting and tax reclaims with HMRC, and other ongoing pension regulation compliance), after the purchase has been processed you could even sometimes hold those sort of assets on paper certificates if you wanted to (although electronic versions of the shares are quicker and easier for brokers to deal with so it's not generally recommended these days).

But basically, it is difficult for HL to justify charging a lot of money to buy shares on a stock exchange (as a transaction fee for doing the work of placing a purchase or sales order) and then also charge an ongoing high fee for maintaining your account (giving you a statement that nothing has changed, and processing corporate actions paperwork from time to time). Therefore the ongoing 'holding charge' is pretty low, otherwise they would not be competitive with the simple execution-only stockbrokers who can offer those transactions for £5 a time with little to no other ongoing charges. Within a relatively free market for services, they can't really get away with charging you hundreds of pounds a year to look after your inactive positions of stock-exchange traded assets, as you will start to wince and go elsewhere.

However, open-ended funds like Vanguard Lifestrategy are a different kettle of fish because each purchase or sale requires the underlying fund manager to process a subscription for new shares or units, or a request for redemption of old shares or units, and it can only be dealt with through the infrastructure of a 'funds platform' through which the fund manager distributes the shares or units to investors / unitholders.

To maintain an account on such a funds platform, and access the various fund managers through the platform, will attract a fee from the platform operator for using it, typically based on the value of assets under administration. It is more expensive to set up and operate a funds distribution platform than a simple execution-only broker who takes your instructions and books a trade on the stock market.

So, groups like HL who offer full platform services and also stockbroker services will often have a different charging basis for one versus the other. The stockbroker / ETF / individual company shares stuff will have transaction fees and a small ongoing admin fee that caps out ; while the funds platform stuff does not need a dealing fee as use of the platform is all covered in the uncapped percentage-based charge (which does reduce as a percentage at very large values).

A number of other groups do it the same way, though there are some which have moved to a fixed fee model with account maintenance fees and then transaction fees for everything (including funds platform services); while some have moved to doing a percentage basis for everything (i.e. including shares and ETFs) but there are not many of those in the DIY market.

You could use Lifestrategy in your ISA and have the ISA with Vanguardinvestor direct, so the platform fee is just 0.15% a year with no transaction fees and if the ISA isn't huge the platform fee won't be huge. Maybe in that case (the ISA was small) and you were using HL for the SIPP you wouldn't mind paying the 0.45% at HL for that ISA funds service - because 0.45% of a small amount is only a small amount.

Using exchange-traded holdings in your SIPP instead of 'funds' to lower your platform fee exposure is one way to do it, if you want to use HL while wanting to avoid uncapped percentage-based fees. But that does require you to decide your equity allocations and bond allocations yourself, and keep them adjusted to your preferences as they grow and shrink with the market.

If you look at how VLS funds are constructed, they don't just have 1 global equities fund and 1 global bond fund. instead, in the higher-equities versions they have multiple geographic holdings with different weightings based on their model, and in the higher-bonds versions they have separate holdings for corporate, government, UK and international, index linked, etc, rather than solely one 'global bonds' fund. So, they'll have 8 funds or 12 funds or whatever, as components of their VLS 40 or 60 or 80 etc. You would need to take responsibility for allocating and reallocating, and also pay transaction fees every time you wanted to buy or sell an ETF holding on the stock exchange to make an update.

Can you be bothered with all that?

EdSwippet

bowlhead99 wrote: »

It is more expensive to set up and operate a funds distribution platform than a simple execution-only broker who takes your instructions and books a trade on the stock market.

There might be some price differential for managing funds/OEICs and stocks/ETFs, but I doubt it is anything like the 15:1 ratio on a £1m SIPP at HL. £3,000/year in OEICs versus £200/year in ETFs looks a lot like simply taking the p..s. Remember that this charge applies even if you have 'accumulation' units and do absolutely nothing with these funds except hold them.

bowlhead99 wrote: »

A number of other groups do it the same way, though there are some which have moved to a fixed fee model with account maintenance fees ...

Personally I have an ideological dislike for platforms that fleece a segment of their customer base simply because they can get away with it. I use only flat fee ones. My cost saving relative to percentage based ones is massive, literally thousands of pounds per year.

bowlhead99 wrote: »

... You would need to take responsibility for allocating and reallocating, and also pay transaction fees every time you wanted to buy or sell an ETF holding on the stock exchange to make an update. Can you be bothered with all that?

If I were an HL customer -- and I am not -- then for £2,800/year, absolutely yes, I could. :-)

Albermarle

Personally I have an ideological dislike for platforms that fleece a segment of their customer base simply because they can get away with it. I use only flat fee ones. My cost saving relative to percentage based ones is massive, literally thousands of pounds per year.

It depend a lot on the size of the fund and whether the platform charges extra for a SIPP and extra for drawdown/withdrawals . However you are right that once the fund gets in the few hundred thousands , you should definitely be in flat fee platform For less than £100K probably a % platform and for around £250K it depends what you hold and what functions you use.

bowlhead99

EdSwippet wrote: »

There might be some price differential for managing funds/OEICs and stocks/ETFs, but I doubt it is anything like the 15:1 ratio on a £1m SIPP at HL. £3,000/year in OEICs versus £200/year in ETFs looks a lot like simply taking the p..s. Remember that this charge applies even if you have 'accumulation' units and do absolutely nothing with these funds except hold them.

Personally I have an ideological dislike for platforms that fleece a segment of their customer base simply because they can get away with it. I use only flat fee ones. My cost saving relative to percentage based ones is massive, literally thousands of pounds per year.

I am not suggesting HL is the best place to run a £1m SIPP invested in open ended funds (not that OP was looking to have a £1m SIPP with them anyway, based on other threads).

I was merely noting why a simple sharetrading product historically had low fixed fees for transactions while a fund access platform just dabbled in percentages and has not historically seen a need to cap at low levels based on what their competition - or lack of it - is doing. Although most platforms that operate on percentage bases do not charge as much as HL for large SIPPs, and/or will taper the charge down at higher values of assets under administration.

The history of it as you are probably aware goes back to how open ended funds used to be charged, with the fund manager taking a high %-based management fee from the fund which they would use to pay commissions to advisors helping introduce clients to them and to the platforms through whom the fund units were distributed to the clients. After the retail distribution review and platform review by the regulator more than half a decade ago, funds started charging less and giving a clean-priced management fee with the advisors and platforms charging explicitly for their services instead

The platforms kept wanting to keep the status quo business model of getting paid more, the more was held on their platform. It means the larger investors who may be less fee sensitive were subsidising things for smaller investors who might not be able to invest at all if they had to pay large fixed fees out of their small investment fund income or gains. That model does unfortunately mean the larger investors are at risk of getting fleeced if they don't shop around for platforms who have a low cap or an aggressive tapering-down of fee scale at higher values. Rivals with more 'modern' price structures will undercut a lot of the older or bigger brands.

If I were an HL customer -- and I am not -- then for £2,800/year, absolutely yes, I could. :-)

While it can be cost-effective to build your own lifestrategy fund out of ETFs when you know what you are doing and have a million, it may not be such an effective solution if you don't know what you're doing and have a hundred thousand.

For example, dealing transaction costs to process your rebalancing buy/sell orders are higher per pound invested when you have smaller amounts invested, and a few hundred quid saving from doing a weekend's review of your investments might sound lucrative to some but it is not nearly as lucrative as if you had ten times the money invested and the savings opportunity was a few thousand instead. There is also a non-zero risk of making mistakes if you are new to investing and asset allocation in the case where all your previous experience has just been DB pensions, AVCs in default allocations, or pre-packaged mixed asset funds.

Unsurprisingly I don't recommend HL for large investors in open ended funds. My Mum has a SIPP with them which is only a few grand so only costs buttons to administer, and also an ISA which is six figures but is not six figures of open ended stuff (which she will be moving in due course but hasn't got round to it yet... despite my suggestion years ago; will probably only do so when my Dad moves his, and he is not fee sensitive so has still not dealt with it either).

EdSwippet

bowlhead99 wrote: »

The platforms kept wanting to keep the status quo business model of getting paid more, the more was held on their platform. ... Rivals with more 'modern' price structures will undercut a lot of the older or bigger brands.

Agreed. Your first post suggested that running a funds platform was somehow a lot more expensive than running a shares one. Clearly not the case, since flat-fee providers still exist at all.

The above is more accurate. The honest answer to the OP's question, posed in the first sentence, is of course: "Because they can get away with it." Cost of product or service to the platform itself barely comes into it, if at all. In fact, my recollection of the RDR is that HL initially planned to charge this uncapped 0.45% on ITs and ETFs as well as OEICs, but backed down later on. That allows one to infer a fair bit about their mindset.

Also, by avoiding being an HL customer I am not complicit in facilitating an increase in dodgy 'fund research'. :-)