Hargreaves Lansdown drops a tracker bombshell
Over the weekend, a number of canny investors had some unwelcome news. And Internet forums -- here on the Fool and elsewhere -- have been humming ever since.
The investors in question are those investing in a number of low-cost tracker funds, principally those from HSBC, Legal & General, via the fund supermarket (or 'platform') operated by Hargreaves Lansdown .
And the news in question was bleak. As from 31 December, Hargreaves Lansdown is introducing a 'platform fee' -- charging investors to hold tracker investments, something that previously had been free.
In short, investing in any of the other 2,400 or so funds carried on the Hargreaves Lansdown platform will continue to be free, with the costs essentially paid for by the 'trail commission' that the fund managers in question paid to the FTSE 100 business.
But funds that didn't pay Hargreaves Lansdown a trail commission -- or didn't pay them very much by way of trail commission -- will in future attract a charge.
No more free lunch
So far, so innocuous. Most of us accept that a free lunch can't go on for ever, and obtaining access to HSBC's low-cost trackers -- second only to Vanguard's in terms of their TER -- has been one of the best free lunches going.
But what has shaken investors -- and infuriated them, too -- is the scale of the platform fee being introduced by Hargreaves Lansdown.
In short, for HSBC trackers, it's £2 per month, per tracker, per account. Legal & General trackers, where the higher TER does include an element of trail commission paid to Hargreaves Lansdown, have a lower platform fee of £1 per month. Trackers from M&G, Fidelity and Henderson also attract the £2 platform fee.
Let's put those numbers in context. My wife, for example, holds three HSBC trackers and a Legal & General tracker in her SIPP. That's £7 a month, or £84 a year, for a SIPP of distinctly modest proportions. And had her ISA been with Hargreaves Lansdown as well, that would have created a further set of platform fees.
Beginning investors are even harder hit. A close friend, for instance, has started paying a modest sum into a Hargreaves Lansdown ISA each month, and has around a couple of thousand pounds invested with the firm in HSBC's FTSE All-Share tracker.
A platform fee of £24 a year will eat up about a third of the dividends generated by my friend's tracker -- a huge chunk compared to the very modest fiver or so charged by HSBC via the TER.
For myself, I've four of the trackers in question, although as the sums involved are significantly higher, the impact isn't as great.
In short, then, the small investor is hit hardest. No wonder Fools are up in arms.
Retail Distribution Review
As I've written before on Fool.co.uk, the imminent onset of the Financial Services Authority-mandated rule changes stemming from the Retail Distribution Review are calling into question exactly how fund platforms make their money.
And going forward, we can expect to see more of this sort of thing, as other platforms, in their own way, follow suit.
In short, it's exactly what the Financial Services Authority thinks that investors should be getting: clear and explicit charging, with an end to hidden fees and murky kick-backs from fund managers to fund platforms.
But just because charges are clear and explicit doesn't make them any more pleasant to pay. And in the case of investors with small investment pots, a platform fee of this scale calls into question the whole logic of investing in a tracker at all. Which can't, surely, be what the FSA wants.
So far, Hargreaves Lansdown remains unmoved. As the company says:
"The cost of managing a tracker fund is significantly less than that of an actively managed fund, so investors should expect to pay less in fund management. However, the service required to buy, hold and administer these funds remains the same as for other funds. Investors do not expect to compromise on service, functionality, administration and secure custody of their funds."
And there is an upside, the company pointed out, when I telephoned its head of research, the ever-engaging Mark Dampier. And it's an upside that may tempt angry investors to stay. In short, Hargreaves Lansdown expects to increase the range of funds it offers.
For which, read Vanguard trackers, as well as a number of low-cost actively-managed funds where the trail commission isn't sufficient to make placing them on the platform attractive enough at present.
Now, both Vanguard and Hargreaves Lansdown are being tight-lipped about all this.
Vanguard's official spokesperson coyly tells me that "there's no news at present." Mr Dampier goes a little bit further, dryly telling me that it's likely that an upcoming announcement "will be of interest to investors." And another source inside Hargreaves Lansdown confirmed to me that advanced discussions are taking place.
What are investors to do?
Predictably, Internet forums are full of people threatening to move their business.
But given that several of the alternatives have a worse reputation for customer service, moving may not be the smartest option. And again, these alternatives may introduce their own platform fees, as well, leaving investors no better off.
But if I wanted to stay with HSBC trackers, I'd certainly check out Alliance Trust Savings, which offers ISA, SIPP and normal dealing accounts. Fidelity's platform, and Fidelity's low-cost MoneyBuilder UK index tracker, could be a smart move, too -- especially if you take the view that Fidelity would be unlikely to charge a platform fee in respect of its own fund, on its own platform.
Personally, I'm doing nothing until I hear a little more about Vanguard trackers on the Hargreaves Lansdown platform -- with the logic being that the lower TER will help pay for the platform fee.
In the meantime, I can't help noticing that Hargreaves Lansdown's charging structure now makes it significantly cheaper for ISA investors with small pots to simply hold HSBC's FTSE 100 tracker ETF instead -- the HSBC FTSE 100 ETF . With a higher fee cap, the logic for SIPP investors isn't so clear-cut, but it's certainly worth doing the sums.
I'm also looking at another interesting option. One of the things being said in some of the Internet forums is that HSBC Global Asset Management (the part of the bank that actually sells the trackers) doesn't offer an ISA.
That's not so. It does -- and what's more, it's free. And for investors starting from scratch, it seems quite tempting. No wrapper fee, no platform fee -- and low-cost HSBC trackers to boot.
ISA transfers, though, are another matter, with the small print seemingly requiring investors to transfer as cash, and be out of the market while the transfer is taking place -- and for a period of up to 30 days.
I've asked HSBC for an explanation about this, and will report back when I get it -- which could be as soon as later today. If so, I'll add a comment to this article, detailing HSBC's response.
In the meantime, what do you think of the bombshell from Hargreaves Lansdown? Comments in the box below, please.
> Malcolm and his delightful wife hold trackers from Vanguard, HSBC and Legal & General, and invest through Hargreaves Lansdown and Alliance Trust.