The following is another guest post from our industry expert who prefers to remain anonymous in sharing these insider tips with us. While we’ll always want to hunt down the cheapest funds and the most cost-effective platforms, I think it’s worth us understanding all of the realities of the investing business.
Everybody hates platforms. What might surprise you is that fund managers hate platforms every bit as much as you do.
While private investors jibe at the costs, the annoying extra charges, and those exit fees, what bugs the fund managers is the difficulty and cost of actually getting on the damn things.
Like most businesses, platforms exist to make a profit for their shareholders.
Except that they don’t.
When the FSA, as it was then, commissioned a leading firm of accountants to analyse the industry in 2012 ahead of RDR, it revealed that only one of them made any money. (But that one did make a lot.)
So why do the others platforms do it?
A business on the margins
Initially many platforms began life simply as a way for fund managers to market their products and make lives easier for IFAs.
They started as a one-stop shop where IFAs could put all their clients’ investments in one place and just get one statement.
Pretty soon though, fund managers realised they could encourage intermediaries to sell more of their funds if they provided some encouragement, known as trail commission.
But now the FCA1 has decided the industry should be transparent about everything, and that has made life a lot more difficult. Even worse, this is happening just when low cost passive funds that don’t pay trail are getting more popular – and fewer people are saving anyway.
Because most platforms lose money, they don’t really want to do anything that might make them lose more, such as stocking a never-ending range of funds. So it is a battle to get a fund onto some platforms and may even involve the payment of a so-called shelf fee just to be included.
Others just point-blank refuse to host a fund they don’t think won’t sell.
Before committing to a platform it is therefore a good idea to see exactly how many funds they stock. It doesn’t help investors much if fund managers create low cost funds but they are not available on the platform of your choice.
Since investing is a game for the long term you want to be fairly confident that the platform will be around for the next few decades.
That is not easy to assess. Nevertheless it is more likely that the profitable ones will survive.
Those that are tagged onto fund management operations as a distribution mechanism might suffer the cost-cutters knife in a few years. If so, this could force investors to move funds and possibly incur costs such as exit fees or maybe even tax. At the very least it involves more paperwork – the very thing platforms were invented to minimise.
Behind the best buy list
Platforms are just there to facilitate investing and keep the process as simple as possible. They most certainly do not provide advice to the investor using them for execution-only.
That might sound odd though to people who see the list of recommended funds that so many promote, whatever they happen to be labelled.
Getting onto these lists is the Holy Grail for fund managers.
Once upon a time such a list might have been compiled through the sage judgement of a seasoned market analyst. However, fund managers soon realised that inclusion in such a list was well worth a good lunch, a game of golf, or maybe just an enhanced trail fee.
Quite why such a distortion of the word recommended – or whatever other euphemism is used – has been allowed to persist for so long by the FCA and its predecessor is a mystery.
Well, no it isn’t actually.
While it is true that some cheap funds are now included in such panels, most of the incumbents are heavily promoted, well known and, usually, the largest funds in such compilations.
After all, why should the platform or broker take a risk on its reputation when it can get an easy life by sticking with the big guns?
Those of an older generation may remember the aphorism; you never get fired for buying IBM – a phrase that emerged in the hey-day of big computing when no one was quite sure what was going on. Buying the market leader was a safe, career-enhancing move.
No platform is going to risk its reputation promoting new funds, especially if they are small and do not spend much on promotion.
Consumers might think that in the new post-RDR investor-friendly world that marketing budgets are less important.
Think again.
The new rules allow managers to assist platforms with marketing costs, such as mail shots. Who could resist the opportunity of getting someone else to pay for the postage and other costs of reminding all your clients that you exist and are ready to help?
If platforms didn’t exist, someone would have to invent them
Perhaps the worst aspect of platforms for fund managers is that they have no idea who their clients are. All they get is a figure for money in or out.
Not knowing exactly who your customers are is major handicap for any business. For one like finance that relies so much on trust, it is a near-fatal flaw and makes it even more impersonal.
But the unfortunate truth is that maintaining all those records, dealing with money laundering checks, sending out reports and dividends is time-consuming and expensive. Fund managers want to manage money, they don’t want to run databases and satisfy the FCA on dozens of different issues.
For all that stuff platforms fill a valuable role. We might not like them, but no one is keen of taking on the tasks they do and certainly not at the prices they charge.
See our table to choose between the different fund platforms.
- Financial Conduct Authority [↩]
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Unfortunately, platforms are required for SIPPs and ISAs. Perhaps it’s because we’re forced to use them, and pay whatever they demand due to the cost and hassle of switching, that we hate them so much?
I know a t least three platforms that make serious profits:
– Hargreaves L
– AJ Bell
– Cofunds
Hargreaves is I think worth more than £6bn and Cofunds was recently acquired by L&G for a sum that valued it at £000s millions
I suspect given long articles in the FT AJ Bell will go the same route
In many respects platforms are just the little brothers of the annuity industry, another way for the vampire squids of the financial services industry to stick their money funnel into my portfolio protected by a wrinkle of government statute
How does the combo platform+fund tend to compare in cost with, for example, Investment Trust+Share Plan? And in performance?
I think it’s naïve to expect your current favourite platform to be around in a few decades time, in any sort of recognisable state. Rather, it’s best to find a platform that at least comes without any unreasonable exit fees. And that’s the crux of the matter. No other industry could get away with them. They are arbitrary, unfair, punitive and anti-competitive. And archaic. And the last two transfers I have done have each taken over 10 weeks. Ridiculous! The industry really needs to get its act together or face further regulation. Although I suspect we will now see some consolidation, post RDR.
@Aidan
I agree with you about exit fees
It allows the platform industry to play its usual “bait and switch” game
But how practically can small investors get together to get exit fees banned by the FCA?
RDR took the best part of a decade to put in place I think…
We’ve already seen “people power” in action as part of the recent mass exodus from Hargreaves Lansdown. On multiple forums people shared legal/regulatory information, wording of letters, and their experiences to help everyone escape from HL before the massive fee hike hit without crushing exit fees.
HL still tried playing games with some people (despite them having multiple chastisements from the FOS in the past) but didn’t get away with it in most cases this time.
There are now encouraging signs that platform switching time and cost is on the FCA radar.
@gadgetmind it would be interesting to know if there actually was a mass exodus from HL. I suspect there probably wasn’t. It just might seem that way from the perspective of this forum.
It would be interesting to know how many clients they lost as a % due to their charge restructure and compare that to say the no. of new clients they gained from the float of royal mail
would put it into some sort of perspective..
@The Rhino – Yes, I’ll also be interested to see the actual figures, and they certainly managed to hang onto some larger portfolios as they were panicked into doing “secret” deals to try and retain business.
The secret deals make a mockery of the RDR rules if they’re decided based on whether clients hold the platform’s favourite funds or the cheapest trackers.
@Rhino
Alliance Trust claim to be packed out with business, so I think there is annecdotal evidence that other providers have picked up customers*
Note: ATS customer service levels have fallen to abysmal levels as a result
*I am considering picking up some Alliance Trust shares, but obviously ATS is a small part of their business and their stock picking is mediocre
Although HL are unlikely to admit to how much business they lost, in either £ or % terms, as a result of their new fees, it might be worthwhile encouraging the other platforms to boast about the value transferred into their keeping, don’t you think?
H & L is one of the leading platforms in the UK and this sense of security is very important to me. I will pay the extra 0.1-0.2%. However, I will switch my funds to ETFs because the 0.45% is rather excessive on large funds, but I will stick with H & L for a portion of my portfolio. My plan is to diversify across 3-4 brokers equally.
In the last couple of years I have personally experienced HL’s service level drop & detected a certain level of arrogance in their dealings with their clients as well as Fund Mgrs.
It is however interesting to note that I’ve seen the arrogance notch up a few points & once/twice verging on rudeness. Based on this evidence I would suggest they’ve clearly lost some clients but suspect not enough to loose sleep. Can’t wait to see their half-full year results & AGM related press releases.
Re funds listed/made available via a platform …. I don’t understand why certain fund providers are categorically excluded. Based on the fact that when I buy into a fund, the platform provider has to place an order on my behalf; surely they can do this in an open market even if that involves niche fund mgrs or having to pay a little extra for sourcing the “buy”.
For example, don’t understand why Hargreaves refuse to make iShare funds available. Never have managed to get a logical explanation from their frontline staff. Can anyone throw light on this?
@kean I shares ETFs are available on H&L. Look under ETFs.
@Jon, thanks. I can find a couple of iShare funds in the ETF section but can’t find the one I am currently interested in – iShr MSCI World ‘B’ UCITS. Believe the code is CSWD.
I don’t think HL refuse to sell traded shares / ETF. The problem I believe is that not all funds show initially when you do a general search on HL. I found the code on another website.
The fund you want is CWD1 – if you type this into HL share section I think it will give you the fund you want.
Talking about HL, did you know that they refuse to deal russian shares? I tried to buy gazprom adr by phone and HL indicated that it is against their policy to deal russian securities. I ended up buying with youinvest without any fuss. No free marker in HL it seems
@ SteveB – thanks. CSWD is a valid code for that fund; but looks like its traded in dollars or Euro. CSW1 is GBX – thank you for finding that for me; I do want Sterling denomination.
@Fernando – not that I necessarily agree with the HL policy but trading with foreign exchanges directly ( as opposed to via managed funds) involves other complications (such as taxes, trading costs, currency exch, etc.). So if HL don’t have an established relationship with a broker to facilitate the trade then I can understand that policy.
As I say, don’t necessarily agree but there is an explanation for it where as with managed funds traded on major exchanges its harder to accept.
SteveB (above) has kindly found the correct code for the sterling version of the fund I was looking for. Apologies if I misled anyone.
Today I received an unsolicited letter from HL thanking me for being a client and outlining that they have some exciting developments planned for the coming year. As well as requesting feedback.
I wonder if HL are likely to review their offering. Perhaps as has been voiced by others that RDR is likely to lead to further adjustments in service, offer (product/service) and pricing.
@William, I have received exactly the same letter. All I would conclude from that letter is that they have had a bruising time in recent months.
Also, quite apart from the charges issue, looks like during the tax year end rush to get certain transactions completed their resources have been stretched (judging by ratty responses I have received from their Helpdesk during this period) and so no doubt they have had some complaints.
I had the same letter. I just think it’s the usual high-quality customer touch from Hargreaves Lansdown.
I’m not sure Hargreaves Lansdown will be rushing to bring pricing down if they can help it. I follow the shares quite closely with my active investing hat on, having enjoyed a nice ride from c.£3 to £7-ish, getting out far too early as usual. My fear was that RDR would hit margins hard. If you look at US providers like Charles Schwab their margins are much tighter, because they didn’t enjoy all the cushy trail commission etc from fund managers that a UK platform like HL enjoyed.
So far Hargreaves has overcome declining margins by growing assets under management (i.e. getting more of our money) at a fearsome rate. It’s by far the strongest platform from this perspective, IMHO. But I believe there is more margin contraction to come, just from the pricing changes it’s already made. That will further pressure the shares.
There’s very little money to be made serving ultra-cost sensitive passive investors, that’s what we all have to remember. That’s not an excuse for any shortcomings you see with them or a reason to pay a lot of money for someone else’s profits, but it is a useful frame through which to see the world. In fact I imagine passive investing is indulged as a loss-leader for the likes of HL, hoping it will eventually tempt customers over with its endless mailed fund promotions. Perhaps the same is even true of investment trusts.
p.s. In short, I suspect their strategy currently is to tough it out through the complaints, lose 1-5% of customers who are very price sensitive / aware and the ones who are complaining, and see who they are left with.
You’d think that as a platform becomes enormous and its systems are fully automated that the marginal cost of supporting additional customers would fall to almost zero. Therefore shouldn’t retaining cost sensitive passive investors like Monevator readers just add a bit of low margin revenue rather than actually costing them money as a loss leader?
The analogy I always come back to is the mobile phone business. By constantly threatening to take my custom elsewhere I’ve managed to get my monthly bill down to around £5-£7 per month. Even though that includes thousands of texts and minutes and over 1gb of data they presumably still make a profit out of me because most of their costs are fixed. Also for many listed companies their market share is important. You don’t get supermarkets ditching their value range because they don’t think they can make any money out of their most cost sensitive customers.
@The Investor, I absolutely agree with you – they’ll ride out the storm. The letter is just (metaphorically speaking) “pressing the flesh”. Always said their communication/PR is very slick.
A recent research note on HL expressed the view that ultimately even public sector pensions will be transferred to DC pensions using external providers.
If that was to happen the prospects for the platforms is vast. Though there would be an awful lot of unhappy civil servants.
Ive posted this elsewhere but here is the interim management statement from hl announced yesterday.
http://www.investegate.co.uk/hargreaves-lansdown–hl–/rns/interim-management-statement/201404160700059168E/
I see the latest group of HL customers to incur some of their sneaky new charges are the, err, dead ones.
When a customer dies they charge £36 per fund for a probate valuation, a fee generously capped at £600.
By way of comparison, Charles Stanley Direct makes no charges at all for this.
More details here:
http://www.bitterwallet.com/hargreaves-lansdown-will-take-care-of-your-isa-so-long-as-you-never-die
Charging the dead – Seems to me that in their arrogance (now standard MO!) they are totally undermining the role of their DEAD Client’s Executor(s) & Trustee(s). Surely, legally they should not be allowed to take such a heavy-handed approach UNLESS ofcourse their DEAD client has appointed HL as Executors. Or, the Executor of the estate (the legal authority to commission such work) has requested proper valuation using IRS rules.
They currently provide half-yearly and yearly Investment Reports and all that would be required of them is to provide this report on request to their Dead Client’s appointed Executor/Trustee who by this stage will have Probate Authority (not HL!)
Can’t help feeling that since the arrival of their new CEO, HL have completely lost the plot!