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Hargreaves Lansdown chief: Did we hear someone suggest price fixing?

Ian-Gorham-MM-Grey-250x255.jpg

I have been amazed to see recent suggestions that the future price of fund management should be fixed, with the same annual management charge on commission free funds paid by all platforms and distributors. 

Fund management companies are commercial suppliers of a service and therefore in competition.  

Any suggestion that an industry should ignore the opportunity to negotiate the best price for clients, and instead agree a cosy norm for prices, is obscene and quite possibly illegal. It is certainly not in the interests of retail investors. 

A single fixed price would undoubtedly increase costs for investors.  A single AMC would need to be fixed at the lowest common denominator – a level that made it still marginally profitable for the fund manager to deal with the most inefficient, useless and tiny institution.  

At Tesco the prices are almost always better than a small convenience store.  That is because Tesco has better negotiating power over suppliers and exercises it mercilessly, because Tesco deals in big quantities, modern technology and the best resources.   

For convenience, go to the local convenience store and pay more.  To save money, reap the benefits of a supermarket’s negotiating power.  Imagine a scenario where Tesco could not negotiate prices, because all prices had been fixed.  There would be outrage. 

Companies like ourselves have been at the forefront of negotiating.  Today, there are very few initial charges on funds because we helped get them removed.  

Arguing for better deals has also allowed us to rebate part of the annual management charge to clients. Our stance of public dislike for performance charges has stunted the proliferation of such charges.  We can and do make a difference on charges.

Those who suggest a single annual management charge should apply across the entire retail market are therefore ignoring the need for a competitive market in self-interest.  It is probably no coincidence that they tend to be small platforms with little negotiating power. Their argument is that one annual management charge would make it a bit easier for the platform industry to transfer client investments around. 

The platform industry is paid to think up answers to questions like efficient portability.  We should focus on what we can achieve for the client, not what makes it easy for ourselves.   Far too many financial products and services have been designed around industry rather than clients.

We will seek the best price for clients that we possibly can on commission free funds.  We care not what the rest of the industry wants to do.   Anyone who suggests that the prices should be fixed across the market is wrong, acting in their own interests rather than those of clients and walking dangerously close to the legal line of promoting anti-competitive practices. 

Are we all going to accept the price of commission-free fund management will be 0.75 per cent forever?  We certainly do not. 

The beneficial consequences of an expanding market, scale, technology improvements and the retail distribution review must include lower costs to investors over time.  We are off to negotiate.

 Ian Gorham is chief executive at Hargreaves Lansdown

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Comments

There are 24 comments at the moment, we would love to hear your opinion too.

  1. But you still take a large chunk of the AMC for providing nothing more than a service with none of the on-going liability for advice.

  2. Perfectly put now just to deal with informed choice marketing sailing so very close to advice with “best buy lists etc”

  3. ”Our stance of public dislike for performance charges has stunted the proliferation of such charges”

    Tickets on yourself or what!

    Apart from that I have to agree with the rest of the article.

  4. A lot of the Anonymous comments sound like jealousy to me.

  5. Got to admire your spin. As an Investor I would rather pay a platform fee of £48 pa and fund fee of 0.75% than pay 1.5% pa for the same fund via Hargreaves and get a “loyalty” bonus of 0.25%.

    If you do negotiate lower fees who will benefit more Hargreaves or me ?

  6. Don’t kid yourself – if HL can negotiate a discount the balance will go in their pocket.

    If every distributor pays the same factory gate price, then consumers can easily compare the distributor’s added charges.

    If they want the best deal for clients, why do Vanguard funds carry an addtional HL charge?

  7. This all sounds sensible, commercially savvy, logical and all hail the client, etc., etc.

    The fly in the ointment is that financial services is a highly regulated industry where transparency is the current king and buying distribution is frowned upon.

    Comparing the one-off purchase of a 50p tin of beans with buying units in an OEIC that mean a long term payment of fees is somewhat disingenuous.

    I have no doubt that the likes of HL have made a positive contribution along the lines suggested in the article. However, they have also made hay in a less than transparent way.

    Of course they want to protect what they have and that’s understandable but claiming it’s all about the client is as rich as they have got on the back of those very clients…

  8. A telling article – Do HL really have clients? or are they customers. In my opinion HL are an untransparent distribution fund warehouse and there is nothing wrong with that.
    I dont object to offering the consumer a lower charging share class as long as it is the consumer who benefits NOT the platform.
    It is difficult to proclaim absolute alegance to the consumers benefit when promoting a fund which pays a higher kick back to the platform. Tranparency is key – We must have a clear platform charge, no kickback/rebates, a clear fund cost and approriate marketing without the illusion of advice.
    Then long live competition.
    At the moment I’m just jealous!

  9. Both Anonymous @ 8.43, I’m not sure you get it, whether you agree with HL setup or not is beside the point. They have produced a product at a price, the public like it and have bought it by the shedload.

  10. I laughed at this one! Competion is OK but really HL are in it for what they can make. All businesses should look at the bottom line of course, but when something threatens the cosy little relationships built up over many years, my how people come up with nonsense to justify their point of view. Rampent uncontrolled capiltalism is as bad as communism. the regulators should look at the big boys rather than us humble IFAs!

  11. I agree with John Blackmores comments and for the record , there are some goods where the prices are fixed for all supermarkets / outlets. SMA baby formula would be an example

  12. Keith S | 19 Apr 2013 9:35 am

    We do get it. Just because the public believe they are getting a good deal doesn’t mean it is a good deal.

    A discounted initial fee is irrelevant over the term of an investment – it is the AMC which has the biggest impact on the Reduction In Yield.

    For a business that has made a small fortune from non transparent charging structures to claim that it is doing it for the clients is rather rich.

  13. @Keith S – I fully accept that Hargreaves have and will no doubt continue to be a highly successful organization.

    However all they are really doing is providing a carrier bag service ( they are NOT giving advice with their best advice lists are they ?) which can be found far less expensively elsewhere.

    I was ,therefore, personally amused at the tone taken in the article. Talk of “interests of retail investors” and words used such as “cosy” and obscene” are really quite funny when comparisons are made with other D2C platforms.

    I believe that an investor could go elsewhere and pay an adviser a trail fee of 0.5% pa and still find himself paying little or no more than by going to Hargreaves direct

  14. The problem is HL actually beleive this article is accurate.

    “Today, there are very few initial charges on funds because we helped get them removed”

    Well, all except on the HL Multimanager portfolios, with a few billion in them, where the fund manger, HL, makes a 5% bid offer charge which is of course an upfront charge.

    Then there are platform fees that are not transparent, fees for tracker funds and of course the use of “marketing allowances” from the fund managers.

    I have nop issues with how successful thay have been, but I think it tells the story by comparing themselves with Tesco, we saw that “price” driven products deliver horse meat burgers !

  15. Ian Gorham seems to miss the point. As many providers still seem to do. As an adviser the future is ADVICE not sales. Those providers who seem hell bent on B2C forget that we may recommend execution only platforms such as HL if that proves to be the right avenue for our clients. The fact that we may be small and inefficient is irrelevant, the new world of ADVICE is here now and is probably going to stay awhile. However things may change and as always advisers will change their spots as they have done in the past. Unlike the big banks and life offices. The Tesco analogy is perfect. When you are at the top the only way is down!

  16. Anonymous @ 10.51.
    I’m not sure you do get it, as far as HL is really concerned, charges are pretty much beside the point. They have a business model, it is highly successful, it has made a lot of money not just for them, but also for many of their customers.

    OK the customers could have made more by accessing the investments in a different way, but they have chosen the simple route, sit at their computer screen for an hour or so and it’s all done, or go to an adviser for an initial meeting (2 hours?) get a massive report to read (yawn) Another meeting to discuss and arrange (1 hour), all for 0.5% pa or whatever. It is not price that matters here, it is convenience.

    Yes the article may be a bit “look what we’ve done”, we may not believe it all, but most of the public may.

    I know we IFA’s offer extra, but HL clients have voted with their feet and their money.

    I’m quite happy that I offer my clients a better service than HL, but I wish I had the foresight to set up a rival 20 years ago.

  17. @ Anon 11:41 I agree completely Advisers need to understand that they should be being paid for advice and NOT for the sale.

    For some clients this means that the advice might be to use a simple inexpensive platform ( saving several thousand pa compared to the typical IFA wrap)

    Perhaps Hargreaves are NOT interested in this market ? and don’t with to compete for adviser business in the way That ATS and others clearly do.

  18. How surprising…. not! HL Chief Exec wishing to maintain his untransparent business model so that his punters won’t find out what HL is really earning from them!

  19. The Tesco analogy doesn’t work. Tesco have only one opportunity to influence customer behaviour and their own profit levels: the price they set products at.

    Here, Ian Gorham is effectively arguing that HL should have two opportunities to do so: the price of their service (i.e. platform fee, which will be the norm before the year is out) AND the product price (i.e. a distributor influenced AMC on the fund).

    For true transparency the product should be priced the same through all distributors, and then customers can make their choice based on the price, features and service of the platform.

  20. As advisers we should only recommend clean or institutional share classes. As HL seems to be able to offer old Retail class funds, the playing field is now tilted. If their sales and marketing bumf compares their offering against a direct purchase from a fund manager, then they probably can make a case. However if they do not add a rider along the lines of ‘From 2nd Jan 2013, regulated advisers have to offer funds with no initial fees and reduced annual management charges where available. Therefore costs of purchasing with advice (HL do not offer advice) may result in lower charges and increased wealth’, then they are not being truthful and honest with their customers and could be subject to censure.

  21. IMHO the required solution is competitive AMCs negotiated on buying power which do not stifle competition by preventing re-registration as a result of all platforms having differenent AMCs for a given fund.

    HL arguement is absolutely valid from a cost point of view. But if that causes issues further down the line, ‘value’ rather than ‘cost’ becomes the issue.

    As a nation we’re infactuated with price and whilst cost is important, value is even more so.

  22. @ Paul Stocks – Indeed value is far more important than price.

    As an investor I have tracker funds charging 0.3% pa and active funds charging as much as 0.75% pa. I see these as good value.

    What I’m not so sure about is the 1% pa that many advisers today seem to think is reasonable. £10,000 pa appears to me to be a little excessive.

    I could reduce that “cost” by going to Hargreaves but £2,500 pa to simply hold my funds again seems a bit OTT

  23. Let’s all’skmg off the same hymn sheet and then discuss it.

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