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Why investors should be wary of discounted funds

The big beast of British investment platforms, Hargreaves Lansdown, has revealed the special discount rates it has secured on index funds.

On the face of it, Hargreaves now hosts the cheapest trackers on the market. From UK equity to emerging markets you could easily put together a diversified portfolio using its range. A range that consists of reputable BlackRock and L&G index funds especially discounted, thanks to Hargreaves’ powers of persuasion and market dominance.

Sadly, while the funds are super competitively priced, Hargreaves’ charges for using their platform are not the best.

The reality is you can buy a much cheaper portfolio using standard-priced index funds from a broker that’s happy to keep a smaller slice of the pie for itself.

What they give with one hand they take away with the other

The table below shows the full cost picture once you add in platform fees.

Every Hargreaves Lansdown fund pick is more expensive overall in comparison to rival Charles Stanley Direct when you add the two fees together:

Hargreaves exclusive index funds OCF (%) Platform fee (%) Total (%) Charles Stanley
regular index funds
OCF (%) Platform fee (%) Total (%)
L&G UK Index C 0.1 0.45 0.55 Royal London UK All Share Tracker Z 0.14 0.25 0.39
L&G US Index C 0.12 0.45 0.57 BlackRock US Equity Tracker D 0.17 0.25 0.42
BlackRock Continental Euro Equity Tracker H 0.12 0.45 0.57 BlackRock Continental Euro Equity Tracker D 0.18 0.25 0.43
BlackRock Japan Equity Tracker H 0.12 0.45 0.57 BlackRock Japan Equity Tracker D 0.18 0.25 0.43
BlackRock Pacific ex Japan Equity Tracker H 0.15 0.45 0.60 BlackRock Pacific ex Japan Equity Tracker D 0.21 0.25 0.46
BlackRock Emerging Markets Tracker H1 0.25 0.45 0.70 BlackRock Emerging Markets Tracker D2 0.29 0.25 0.54
L&G International
Index C
0.2 0.45 0.65 Fidelity Index World Fund I 0.15 0.25 0.40
L&G All Stocks Gilt
Index C
0.1 0.45 0.55 Vanguard UK Government Bond 0.15 0.25 0.40

Note: Dealing costs are zero. The above table shows a representative sample of the full HL range.

What’s the difference?

You’d pay 34% more overall for the privilege of holding a portfolio of Hargreaves Lansdown’s “super low cost” trackers in comparison to their equivalents at Charles Stanley, using the following assumptions:

  • The portfolio equally weights the seven fund categories above (excluding the International fund which wouldn’t be needed).
  • Costs are calculated on a portfolio that’s smaller than £250,000. Both Hargreaves Lansdown and Charles Stanley offer reduced rate tiers beyond this figure.

The weighted total cost of the portfolios is 0.59% at Hargreaves Lansdown and 0.44% at Charles Stanley.

On a £10,000 portfolio that’s no big deal: you’d pay £59 to Hargreaves and £44 to Stanley. I wouldn’t rush for the door for the sake of £15, especially when may have to pay exit fees.

But as you go up the scale, the gulf widens. On a £50,000 portfolio you’d pay:

  • £295 p.a. to Hargreaves Lansdown
  • £220 p.a. to Charles Stanley
  • £99 p.a. to a fixed rate broker like Interactive Investor or iWeb (assuming you can keep your dealing costs within the £80 threshold, which is eminently doable for a passive investor).

Imagine your £50,000 portfolio made a return of 3% that year or £1,500. Hargreaves’ charges would snaffle 20% of that return. Charles Stanley would chomp 15% while Interactive Investor would take less than 7%.

That’s a big difference and it exemplifies why inertia and headline claims of “super low cost” deals are the investor’s enemy if left unchallenged.

Of course if we saw, say, a 20% year, then the percentage of returns eaten up by all these charges would be a lot lower. But you can count on returns closer to the 3% end of the spectrum than the 20% end over the long term.

Hi Fidelity

Fidelity is the other big player who is sounding the horn for its exclusive low cost trackers. Again, the manager’s special is a dish best served to someone else:

Fidelity exclusive funds OCF (%) Platform fee (%) Total (%) Charles Stanley
regular index funds
OCF (%) Platform fee (%) Total (%)
Fidelity Index UK 0.09 0.35 0.44 Royal London UK All Share Tracker Z 0.14 0.25 0.39
Fidelity Index US 0.09 0.35 0.44 BlackRock US Equity Tracker D 0.17 0.25 0.42
Fidelity Index Europe Ex UK 0.16 0.35 0.51 BlackRock Continental Euro Equity Tracker D 0.18 0.25 0.43
Fidelitity Index Japan
0.15 0.35 0.50 BlackRock Japan Equity Tracker D 0.18 0.25 0.43
Fidelity Index Pacific Ex Japan 0.2 0.35 0.55 BlackRock Pacific ex Japan Equity Tracker D 0.21 0.25 0.46
Emerging Markets3 0.27 0.35 0.62 BlackRock Emerging Markets Equity Tracker D 0.29 0.25 0.54
Fidelity Index World 0.18 0.35 0.53 Fidelity Index World Fund I 0.15 0.25 0.40

Note: Dealing costs are zero.

As with Hargreaves Lansdown, Fidelity is second class in every category. It even takes a beating from the institutional version of its own World index fund that’s available from Charles Stanley.

The weighted total cost of both portfolios is 0.51% vs 0.45%.4 In other words, you’ll pay 13% more for Fidelity’s exclusives.

That’s only £6 difference on a £10,000 portfolio but as your wealth heads north of £16,000 then you’re increasingly better off with a fixed fee broker.

Cleaning up

Don’t think you’re getting anything special with exclusives funds – sometimes described as Super Clean by an industry that believes you can shift anything as long as you market it correctly.

Super Clean funds are just low-price share classes of regular funds. In other words, they are exactly the same thing except for the discount.

If the discounted fund’s Ongoing Charge Figure (OCF) plus the platform fee amounts to more than you’d pay for much the same thing elsewhere then who wins? Not the investor that’s for sure.

(Ignore any references to Annual Management Charges (AMC) or any other fund fee formulation that isn’t labelled the OCF or Total Expense Ratio (TER) or “total cost of investing”. AMCs are just another little trick designed to wrong-foot unwary investors and to underplay the true costs of a fund).

What’s more, an ‘exclusive’ fund that’s not stocked by other platforms may cause problems if you decide to switch later on.

You may have to sell your exclusive into cash to facilitate the transfer and buy into a new fund that is more commonly available. That’s time out of the market that could cost you more money and may put you off a switch that would otherwise work in your favour.

So don’t be lured in by special offers designed to make you feel better about paying more for the same thing.

Big brands will always try to leverage their cachet but as savvy DIY investors we should seek out their hungrier, more competitive rivals who are prepared to do us the best deal.

Take it steady,

The Accumulator

  1. Full name is BlackRock Emerging Markets Equity Tracker H []
  2. Full name is BlackRock Emerging Markets Equity Tracker D []
  3. Full name is Fidelity Index Emerging Markets []
  4. The assumed portfolio consists of equal weightings of the six equity funds in the table once the World fund has been excluded. This is being generous to Fidelity as the portfolio doesn’t include a gilt fund, a common category where it does not offer a discount. []

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{ 54 comments… add one }
  • 51 spacebadger March 10, 2014, 1:08 am

    Just listened to moneybox show, well done. I have recently recommended this blog as a clear and unbiased place to learn and the moneybox recording vindicates that….

  • 52 AJ March 10, 2014, 11:13 am

    One thing I didn’t notice, but I think should be mentioned is that all these ‘super low cost’ funds also come with a nasty spread. As far as I can see, all the HL suggested trackers come with a spread. Does the cheaper on going charges outweigh the spread?

  • 53 M.A March 11, 2014, 6:41 pm

    I was pretty much clear about all of the changes to-date and since seeing the unit prices of clean funds I am lost again. In theory – certainly in my head – if the AMC goes down from 1.5% (just as an example) to say 0.75% and then the investor pays the broker/platform fees directly then certain on the D-day at least I expected to see the fund unit cost to come down.
    I’ve been monitoring 10-15 UT/OEIC funds and they are all over the place – some are about the same price, others slightly less but a noticeable number way over the unit cost of the dirty/bundled.
    Don’t get this at all! What am I missing? HELP

  • 54 The Champ April 1, 2014, 9:22 am

    I’ve never posted here before but the phone call I just had with HL prompted me to. When pressing them a bit about the change in fees, the call centre staffer said: ‘it’s not an increase, they’re just different’. I pointed out in no uncertain terms that could not possibly be true for every client, and that for me it would mean an increase. What made me angry was that they sounded distinctly like pre-prepared statements from a crib sheet. It may have been a slip of the tongue but I was left with the impression that I was being misled. I wonder how many others have received the same comments? Far be it from me to suggest that HL are deliberately misleading their customers. Thank goodness for monevator and keep up the good work.

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