The well-known financial services provider Hargreaves Lansdown is about to sting investors with a new charge on many of its funds, including the UK’s most popular index funds.

A number of Monevator readers were quick to sound the alarm about this new platform fee that will doubtless slip under the radar of many other people with Hargreaves Lansdown accounts.

The damage

The new fee headlines are:

• A platform fee that will cost £1 to £2 per month per fund affected. Not so bad, you might think, but it soon adds up (more on this below).

• The entire range of HSBC index funds face a platform fee of £2 per month or £24 per year.

• L&G’s Global Emerging Markets index fund will cost £1 a month extra while its index-linked gilt fund will cost £2 a month more.

• These charges are heaped on top of any other fees you might expect, like the Total Expense Ratio (TER).

The platform fee comes into force on December 31st and in some cases it replaces the 0.5% plus VAT that Hargreaves Lansdown currently slaps onto unfavoured funds in ISAs and SIPPs (This 0.5% charge stays in place on ETFs, investment trusts and other investments that don’t pay trail commission).

While that softens the blow slightly, paying additional fees will be an entirely new and unpleasant experience for investors in HSBC’s low-cost index funds.

The impact

If you held the seven index funds that comprise the Monevator Slow & Steady passive portfolio then you’d pay out £156 per year on platform fees.

That’s 0.78% knocked off a £20,000 portfolio per year – a substantial cost to bear.

Worse, the Slow & Steady portfolio was designed so that small investors can build a low-cost portfolio with regular contributions over time.

Hargreaves Lansdown’s platform fees would swallow 2.6% of our portfolio’s £6,000 contributions in year one1 – a horrendous drag on growth. Like tying Mr Creosote to the back of a Lamborghini.

Evasive action

Keeping costs low is a crucial part of any passive investor’s strategy. But there’s no need to be passive about this charge when other platform providers offer a cheaper deal.

You can get a similar range of index funds and ETFs from:

1. Interactive Investor: No extra charges to pay on ISA or fund trading accounts.
2. TD Waterhouse: No extra charges on ISA accounts worth more than £5,100, but £30 + VAT annual charge on accounts worth less.

Those are just two lower cost alternatives. There are others but the permutations vary depending on your needs. Hargreaves Lansdown was far from the cheapest platform out there, even before this move.

Switching fees

(Updated 21 November) If Hargreaves Lansdown’s platform fee really has pushed you too far then be advised there’s one last pound of flesh to pay – a switching fee, which varies according to account type:

Note we didn’t find Hargreaves Lansdown’s website particularly clear about these switching fees, but we have clarified with them that the fee is charged per fund for ISA and fund & share accounts, but it is a flat £75+VAT fee for SIPPs.

Clearly, if your decision is purely cost-based then you may be better off paying the switching fee than leaving your funds to be moth-eaten by unnecessary charges.

Take a look in the comments below for some reader ideas on reducing switching fees.

Take it steady,

The Accumulator

1. Assuming flat growth over the year, which is quite an optimistic assumption right now. [↩]

Some great reads from around the web.

Again and again during the four-year financial crisis, we’ve had to get to grips with complex ideas that have eventually been so well-understood that we wonder why our 96-year old grannie didn’t raise the alarm.

We all now see why sub-prime mortgages blew-up, for example. What were they thinking? Yet at first it was a jumble of new acronyms (MBS, CDS, AAA, ETC) and labyrinthine banking lore.

Europe’s woes are now putting us through a similar wringer.

Currently the class is stuck on the reluctance of Germany to bail out its hapless neighbours. We’ve already learned it’s in Germany’s interest to do so, and we have heard that the Germans are culturally afraid of inflation, but the narrative hasn’t yet become everyday fodder on the Clapham Omnibus.

But after reading my post of the week from the Psy-Fi blog, your 96-year old grannie will find it a doddle to explain the situation to the other ladies in her quantum physics club.

Author Timmar writes:

Yoking Germany and Greece together in an economic union with a common currency ensured that the interest rates Greece paid dropped to the same level as that of Germany. This was because of something called “convergence”, the concept that all of the Eurozone countries were financially equivalent.

This is the kind of idea that bond markets have when isolated from the real-world and fed too much coffee.

He goes on to explain why the history of Germany makes redressing the fall-out so difficult, concluding:

The Eurozone has benefited no country more than Germany and for it to continue then the massive trade surpluses run by Germany as a result of this need to be redistributed across the other countries in the union. Otherwise the whole scheme is just a way of impoverishing the rest of Europe – which, ultimately, will be felt in the falling earnings of German companies.

Of course, the psychology of the situation makes this virtually impossible. The haunting fear of inflation means that the only possible solution, to German minds, is that Greece and the rest of the spendthrift nations must obey the rules and become German clones. That this is both physically and mentally impossible is the festering canker at the heart of European union.

It’s a super article from a great blog. It’s also pretty downbeat – unnerving if like me you expect the Germans to bow to the inevitable eventually.

[continue reading…]

We’ve reached the final post in our mini-series comparing ETFs and index funds, so it’s appropriate to consider which tracker makes ongoing maintenance such as dividend reinvestment in your portfolio less painful.

And it’s fair to say that index funds win out over ETFs when it comes to important investor duties like rebalancing and reinvesting.

Both tasks are easier to perform with index funds than with ETFs.

Trading ETFs in small amounts to rebalance your portfolio comes a cropper due to the high dealing fee factor for ETFs.

Index funds that don’t attract dealing fees neatly sidestep any such worries.

Dividend reinvestment made easy

There’s more! Most index funds are available in accumulation and income varieties. Accumulation units automatically reinvest your dividends back into the fund, whereas income units hand them over to you.

Far fewer ETFs are available in dividend reinvestment flavour1. As a result, you will incur costs on reinvesting the dividends from your ETFs.

What’s more, if your dividends are paid out as cash then you must also confront the demon temptation of not reinvesting your dividends at all, but instead spending them on having a good time!

You decide what matters most for you

This table below shows the results of our ETF versus index fund face-off. Click the links to read any articles you missed:

	ETFs	Index funds
Simplicity		Winner
Costs		Winner
Tracking error	Draw	Draw
Choice	Winner
Control	Winner
Reinvestment		Winner

Only you can know how important each of these factors is in your decision to choose between index funds or ETFs – or indeed to choose a mix of fund types.

I’d suggest you pick what works for you. The differences between the two tracker types are in some cases fairly technical but, on a personal level, I find index funds to be much more straightforward.

Plus I draw a good deal of comfort from their long, scandal-free track record!

Take it steady,

The Accumulator

1. Reinvesting ETFs are termed as capitalising in ETF circles [↩]