Higher fees for investors without intermediaries

zacchaeus_2

Hi everyone,

I note that there are some investment products that charge higher fees for investors without intermediaries/advisers.  For example, the Octopus Investments AIM ISA has the following fee structure:

If investing through an adviser:
- Initial charge: 0%
- Ongoing annual fee: 1.5%+VAT
(Obviously you'll pay fees to the advisor as well.)

If investing directly (or through execution-only adviser):
- Initial charge: 1%
- Ongoing annual fee: 2%+VAT (of which 0.5% goes to execution-only adviser, if there is one)

The justification Octopus gives for this is: "We encourage our investors to seek financial advice when making investment decisions. We therefore charge investors who have not taken advice a higher fee."

I find this outrageous, especially the "justification", but Octopus is not alone.  My question is: has anyone had any luck with haggling over this sort of nonsense (with any providers; again, I'm just using Octopus as an example)?

Many thanks!

HappyHarry

Generally, providers find that intermediaries are easier to deal with than retail clients, and so the expense of providing a service to intermediaries is lower.

dunstonh

I find this outrageous, especially the "justification", but Octopus is not alone.  My question is: has anyone had any luck with haggling over this sort of nonsense (with any providers; again, I'm just using Octopus as an example)?

Intermediaries take on the liability for the sale of the product.   So, that reduces the cost.   Intermediaries also do a lot of the processing.  So, again, that passes on a lot of the cost.

So, it is quite logical that the product can be cheaper when an intermediary is used.

If investing directly (or through execution-only adviser):
- Initial charge: 1%
- Ongoing annual fee: 2%+VAT (of which 0.5% goes to execution-only adviser, if there is one)

That is not correct.   There is no VAT on intermediation.   So, the adviser fee is non-vatable.  (although I am not sure many advisers would do execution only on AIM).   There is also transactional advice with no ongoing charge.  

wmb194

I realise it's only an example but when you have something that only invests in between "20 and 30" companies you could just copy it and own the companies directly. From a cursory look it appears to be picking the more stable, lower risk AIM companies. Otherwise, there are plenty of funds available on execution only platforms/brokers that don't charge these fees.



https://media.octopusinvestments.com/m/3c62e61c6fafc9df/original/Octopus-AIM-Inheritance-Tax-Service-factsheet.pdf

Malthusian

zacchaeus_2 said:

I find this outrageous, especially the "justification", but Octopus is not alone.  My question is: has anyone had any luck with haggling over this sort of nonsense (with any providers; again, I'm just using Octopus as an example)?

You're proposing to ring up Octopus and occupy their staff with a lengthy phone call to persuade them to drop the charge they apply to cover exactly that kind of phone call. 

People who describe commercial charges for a service they don't have to use as "outrageous" are also liable to make complaints when their share portfolio falls by 80%+, which is another risk that Octopus is shielded from for investors who have a financial adviser.

wmb194 said:

I realise it's only an example but when you have something that only invests in between "20 and 30" companies you could just copy it and own the companies directly. From a cursory look it appears to be picking the more stable, lower risk AIM companies. Otherwise, there are plenty of funds available on execution only platforms/brokers that don't charge these fees.

There's more to it than that because the portfolio is specifically designed to invest in AIM companies that qualify for Business Relief and are exempt from Inheritance Tax. Not all AIM shares qualify - any that are dual-listed on another stock exchange or are deemed to be "investment companies" won't. So to DIY this job you need to constantly monitor all the shares to make sure they still qualify. If any get promoted to the Main Market, or dual-list in pursuit of new investors (the whole point of investing in small companies is that they can get bigger, remember) you have to sell them and find new BR-qualifying shares.

And this an ISA, so if any shares get delisted (also an occupational hazard with AIM shares) you become a forced seller, and you have to again find a new BR-qualifying share to avoid losing the IHT relief on whatever is left.

But there is nothing to stop you DIYing that job. The objective is Inheritance Tax relief so you will need to carry on doing that job until you die.

Nardy

Out of interest I explored trying to buy something from Octopus using the Interactive Investor site and you can't do it through site links, it has to be done via a phone call.

Hoenir

zacchaeus_2 said:

I note that there are some investment products that charge higher fees for investors without intermediaries/advisers.  For example, the Octopus Investments AIM ISA has the following fee structure:


I find this outrageous, especially the "justification", but Octopus is not alone.  My question is: has anyone had any luck with haggling over this sort of nonsense (with any providers; again, I'm just using Octopus as an example)?

Free market. Find an alternative product. Pricing is structured to recover the cost of servicing the respective client bases. 

wmb194

Malthusian said:

zacchaeus_2 said:

I find this outrageous, especially the "justification", but Octopus is not alone.  My question is: has anyone had any luck with haggling over this sort of nonsense (with any providers; again, I'm just using Octopus as an example)?

You're proposing to ring up Octopus and occupy their staff with a lengthy phone call to persuade them to drop the charge they apply to cover exactly that kind of phone call. 

People who describe commercial charges for a service they don't have to use as "outrageous" are also liable to make complaints when their share portfolio falls by 80%+, which is another risk that Octopus is shielded from for investors who have a financial adviser.

wmb194 said:

I realise it's only an example but when you have something that only invests in between "20 and 30" companies you could just copy it and own the companies directly. From a cursory look it appears to be picking the more stable, lower risk AIM companies. Otherwise, there are plenty of funds available on execution only platforms/brokers that don't charge these fees.

There's more to it than that because the portfolio is specifically designed to invest in AIM companies that qualify for Business Relief and are exempt from Inheritance Tax. Not all AIM shares qualify - any that are dual-listed on another stock exchange or are deemed to be "investment companies" won't. So to DIY this job you need to constantly monitor all the shares to make sure they still qualify. If any get promoted to the Main Market, or dual-list in pursuit of new investors (the whole point of investing in small companies is that they can get bigger, remember) you have to sell them and find new BR-qualifying shares.

And this an ISA, so if any shares get delisted (also an occupational hazard with AIM shares) you become a forced seller, and you have to again find a new BR-qualifying share to avoid losing the IHT relief on whatever is left.

But there is nothing to stop you DIYing that job. The objective is Inheritance Tax relief so you will need to carry on doing that job until you die.

I realise but if it only ever holds between 20 and 30 it won’t be that hard to monitor. Obviously though that’s the nature of DIY, you have to decide whether it’s worth the effort. 

Companies aren’t promoted to the main market, they choose to change their listing and from what I’ve observed it doesn’t happen much. Dual listings for these sorts of companies would be unusual as well. It’s surprising how few FTSE100 companies have dual listings.

zacchaeus_2

Thanks everyone for the interesting engagement. I'm returning to this after quite some time, but wanted to respond to a few of the points made.

dunstonh said:

If investing directly (or through execution-only adviser):
- Initial charge: 1%
- Ongoing annual fee: 2%+VAT (of which 0.5% goes to execution-only adviser, if there is one)

That is not correct.   There is no VAT on intermediation.   So, the adviser fee is non-vatable.  (although I am not sure many advisers would do execution only on AIM).   There is also transactional advice with no ongoing charge.  

Thanks dunstonh.  This is based on what it says in Octopus's brochure The exact wording is:

If you are investing through an intermediary who doesn't give you advice (execution only)
...
Annual management charge (0.5% of which will be paid to your introducing agent): 2%+VAT per annum

I assume this means that either there is VAT on the full 2% because the whole supply is between Octopus and the consumer (with a separate supply for the 0.5% between the agent and Octopus as it's effectively a commission) or - perhaps more likely(?) - that there is VAT on 1.5% out of the 2%?

Malthusian said:

You're proposing to ring up Octopus and occupy their staff with a lengthy phone call to persuade them to drop the charge they apply to cover exactly that kind of phone call. 

Actually, I was rather hoping it would be a quick call!    Hence my asking whether others had had any success with haggling - to gauge the chances of that happening.

...

In other words, I'm looking to occupy your time, rather than that of Octopus's staff!

Malthusian said:

People who describe commercial charges for a service they don't have to use as "outrageous" are also liable to make complaints when their share portfolio falls by 80%+, which is another risk that Octopus is shielded from for investors who have a financial adviser.

As I said in the OP, it's mostly the justification they give for the additional charges that I find outrageous. Lots of valid reasons have been given above for why it's commercially rational for Octopus to charge direct investors more (including this one, setting aside the rather gratuitous personal dig), but it's disappointing for a business that makes a lot of its transpararent pricing structures to imply that they're basically charging in this way to protect the consumer, rather than being open and saying direct investors cost more.

Hoenir said:

Free market. Find an alternative product. Pricing is structured to recover the cost of servicing the respective client bases. 

Well, yeah, of course it's a free market, but free markets also allow haggling; hence the question.

dunstonh said:

Intermediaries take on the liability for the sale of the product.   So, that reduces the cost.

Hmm. Intermediaries will certainly drive most custom to the product but, given that Octopus doesn't appear to spend (much) money actively marketing to independent investors, I would expect the marginal cost to Octopus of sales to the minority of investors who approach them independently should be minimal.

I appreciate, however, that this pricing structure probably helps to incentivise the intermediaries to push the product, so again I get the commercial rationale.  I still think it's legitimate for consumers to challenge that, though: as Hoenir says, it's a free market, and this is kind of the stated raison d'etre of MSE.

dunstonh said:

Intermediaries also do a lot of the processing.  So, again, that passes on a lot of the cost.

Do they (necessarily), though?  Again using the Octopus ISA as an example, of the roughly 4 pages of the application form (excluding cover and signature page and ISA transfer forms), 1 of them is the advisor's details and 1 is basically about how the advisor is getting paid.

The intermediary may do an ID check on the applicant and provide a certified ID Verification statement, but presumably any saving for this is counterbalanced by the need to do checks on, and potentially set up payments to, the intermediary themselves.

Granted, the intermediary will do some very basic filtering of would-be applications (non-UK resident; client suitability exercise; investment amounts under the minimum; already subscribed in-year; etc), but otherwise it's not clear to me that an awful lot of processing is being taken out of the hands of the provider.

I do admit I have a bit more sympathy for the principle of additional annual charges due to the points made about risk of these clients being more time-consuming.



Anyway ... belated thanks again to everyone for all the thoughts.  I don't think we'll ultimately go down this route for various reasons (not least what Mrs Reeves says next month!), but if we do I am minded to have a chat with the providor about whether anything can be done around at least the initial charge if the initial investment were to be a substantial multiple of the ISA allowance.

Bostonerimus1

Hoenir said:

zacchaeus_2 said:

I note that there are some investment products that charge higher fees for investors without intermediaries/advisers.  For example, the Octopus Investments AIM ISA has the following fee structure:


I find this outrageous, especially the "justification", but Octopus is not alone.  My question is: has anyone had any luck with haggling over this sort of nonsense (with any providers; again, I'm just using Octopus as an example)?

Free market. Find an alternative product. Pricing is structured to recover the cost of servicing the respective client bases. 

Yes, you are usually free to go elsewhere. Where you don't get such choice is with a workplace pension scheme and it's important to understand the charges and make sure your employer is using a sensible provider.

I've never seen the utility of putting extra intermediaries between me and my money so I use Vanguard in the US and limit myself to Vanguard funds (in the US Vanguard is also a full service brokerage) as they have no initial fee, transaction fees or platform fees for most accounts and all I get charged is the fund fees. I wouldn't consider something like Octopus because of the fees and how they are structured - 1.5% plus advisor fees sounds totally ridiculous to me.

wmb194

Bostonerimus1 said:

Hoenir said:

zacchaeus_2 said:

I note that there are some investment products that charge higher fees for investors without intermediaries/advisers.  For example, the Octopus Investments AIM ISA has the following fee structure:


I find this outrageous, especially the "justification", but Octopus is not alone.  My question is: has anyone had any luck with haggling over this sort of nonsense (with any providers; again, I'm just using Octopus as an example)?

Free market. Find an alternative product. Pricing is structured to recover the cost of servicing the respective client bases. 

Yes, you are usually free to go elsewhere. Where you don't get such choice is with a workplace pension scheme and it's important to understand the charges and make sure your employer is using a sensible provider.

I've never seen the utility of putting extra intermediaries between me and my money so I use Vanguard in the US and limit myself to Vanguard funds (in the US Vanguard is also a full service brokerage) as they have no initial fee, transaction fees or platform fees for most accounts and all I get charged is the fund fees. I wouldn't consider something like Octopus because of the fees and how they are structured - 1.5% plus advisor fees sounds totally ridiculous to me.

The point of this Octopus AIM fund is to avoid/minimise inheritance tax - certain AIM companies are exempt - so paying a fee might be worth it.