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Chris Gilchrist: Hargreaves’ pricing shows fund group pressure has only just started

Advisers are set to benefit from Hargreaves Lansdown’s new pricing structure as it sets the bar for other platforms but there is not much good news for fund managers.

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The end of the beginning. It was inevitable that the cheapo discount merchants would lay into Hargreaves Lansdown for the ‘lack of transparency’ of its new pricing structure.

I was more interested in the fact that the discounts on the funds were not as big as I had expected. But I take this simply to mean that Hargreaves is going to come back for a second bite at the cherry before 2016.

I expect them to watch weak-kneed fund managers offering other distributors similar superclean terms and then go back to demand even better terms from those fund groups. The downward pressure on fund manager margins has only just begun and has a long way to go. 

For many people on the other side of the fence this is big news and bad news for the size of their  bonuses and quality of their wheels. For advisers, on the same side of the fence as our clients, it is good news but scarcely likely to cause any popping of corks. All it means is that thanks to the regulators a moderately level playing field has resulted in overall fund ownership costs now being pretty similar for both execution-only platforms and advised platforms.

Please, please do not respond to this with comments about how 10 bps here or there is a big deal. To 99 per cent of adviser clients it simply isn’t and never has been. Advisers interested in attracting devoted cheeseparers may be able to identify people who would now actually pay less overall on some adviser platforms than on Hargreaves. If trying to attract such investors strikes you as sensible, I suggest you change your medication. 

Hargreaves will, I am sure, continue to attract enough assets to sustain its pre-eminent position. This is not about price but about content and functionality. On both counts it’s site scores very well.  Agree or disagree with Hargreaves’ Wealth 150 fund selections but they have more analysts crunching numbers and drilling into the detail than anyone else. Mostly they do a pretty good job of explaining why they have chosen these funds. And they can still give everyone lessons in communication with clients.

Assembling funds into portfolios is something most DIY investors probably are not very good at. Look at the readers of the Investors Chronicle who submit their portfolios for expert comment each week. A lot are terrible – too much risk, too little risk, too many or too few holdings, too much sector or country exposure and so on.

I would lay money most Hargreaves’ clients’ DIY portfolios are seriously out of whack, inconsistent with their objectives and their capacity for risk.

The next big thing for Hargreaves may well be its multi-manager portfolios, which have never attracted real money. Under the old rules, Hargreaves made money by encouraging its clients to overtrade in too many funds. Now it will make more money by encouraging them to buy its MM offerings. If it succeeds in this it will be even worse news for fund managers.

I think advisers should be happy that Hargreaves is pressurising fund managers into lowering their fees. It is inevitable this will ripple out through the market. But all we have seen so far is the first wave.

I think the implications for fund managers are obvious: stay as a boutique or get bought by one of the big gorillas. The middle ground will be a tough place to be.

Chris Gilchrist is director of Fiveways Financial Planning, a contributing author to Taxbriefs Advantage and edits The IRS Report

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