I have had a few run-ins with Hargreaves Lansdown of late and have been saddened at how a once straight-talking company seems to be using spin that would put some politicians to shame. Ian Gorhams ‘price fixing’ article arguably being yet another example.
My bone of contention with Mr Gorham’s article is that it suggests Hargreaves Lansdown’s prime motivation in seeking a lower AMCs than competitors is to “seek the best price for clients that we possibly can”. Cutting costs for clients sounds very commendable, but I suspect his actual motivation might be more to preserve Hargreaves Lansdown’s rather high Vantage margin.I will save discussion on whether larger distributors should enjoy a lower annual management charge than smaller competitors for another day. But the power firmly rests with those providers behind the handful of “mega” funds that no platform can risk being without (for example, Invesco Perpetual High Income).
Let’s take a look at some facts:
According to its current Vantage Key Features Document (03/04/2013), Hargreaves Lansdown receives an average 0.77 per cent annual commission from fund providers from which it rebates an average 0.17 per cent via a “loyalty bonus” to clients, so a simple 0.6 per cent annual margin. I would have liked to include some fund specific commission examples but I cannot, as Hargreaves Lansdown does not publicly disclose these.
The actual Vantage margin is 0.81 per cent including other fees and profit on client cash balances (based on 2013 interim results), but let’s stick with the 0.6 per cent figure for now.
When Hargreaves Lansdown finally moves to clean units (either voluntary or enforced), in simple terms it will need to charge its clients 0.6 per cent a year to maintain its current margin (probably necessary to keep shareholders happy). While total cost might be unchanged from now, many clients will, for the first time, realise exactly how much they are effectively paying Hargreaves Lansdown for the Vantage service. Since 0.6 per cent looks expensive versus competitors like Charles Stanley Direct at 0.25 per cent (or less), this risks Hargreaves Lansdown losing clients in droves once the penny drops.
The only way out of this for Hargreaves Lansdown that I can see, if it is to preserve its current margin, is to negotiate much lower AMCs than the competition. So even when tacking on its explicit annual charge, of say 0.6 per cent, the total cost is more on par with competitors.
So come on Mr Gorham. Yes, you might technically be seeking the best (fund) price for clients you possibly can, but isn’t this more about protecting your margin?
If you will also cut your margin to ensure Hargreaves Lansdown clients get the lowest combined fund/platform price then I will salute you and eat humble pie (I suspect Tesco’s margin is lower than a convenience store’s). Otherwise, please give the spin a rest.
Justin Modray is founder of CandidMoney.com