I like watching comedians at work. By that, I don’t mean the actual telling of a joke, funny though that is. What I like is the skill involved in the overall process itself, a combination of first carefully preparing the audience, creating the mood and then finishing them off with a cleverly honed gag.
What I like best of all is how some jokes stand the test of time, like the husband who asks his wife if he is the only man she ever loved. “Of course you are, dear. Why do all men ask the same question?”
Which brings me to a crack I once made about Peter Hargreaves, co-founder of Hargreaves Lansdown, after he had slated the iniquities of indemnity commission for the 452nd time.
Echoing the famous Mrs Merton TV interview with Debbie McGee a few years ago, in which she was asked what attracted her to “millionaire Paul Daniels”, I enquired: “So, mass-scale discount broker Peter Hargreaves, what is it that leads you to slag off upfront commission?”
By and large, I think that one still works.
All the more so when reading a recent Money Marketing article by Hargreaves chief executive Ian Gorham, in which he says he is “amazed” by 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.
Gorham was responding to reports in the paper at the beginning of the month that some platforms are incensed by the possibility that fund management groups keen to win business from their rivals may offer preferential share classes with lower in-built charges.
“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,” Gorham thundered in response.
I can quite understand where he is coming from. His company’s business model has always been based on having no initial commission and a built-in service charge. As long as you can weather the first few years of income famine, you are laughing all the way to the bank.
And if not exactly cracking up with joy, Hargreaves is certainly smiling broadly: last week it was reported that the company now has a staggering £35bn under administration, up from barely £1bn just six or seven years ago.
Using its marketing resources – and benefiting from the growth of so-called DIY investors in the wake of the RDR – Hargreaves is able to attract huge inflows of funds.
Having created its own Vantage platform at considerable technical and financial cost, it now controls that crucial aspect of the distribution chain as well. It is therefore in a position to negotiate hard with fund providers in terms of the annual management charge. Small wonder that Hargreaves is determined to protect its competitive advantage.
As one or two people have noted, a considerable part of that discount benefits the company’s bottom line. But Hargreaves Lansdown has become adept at balancing its own interests with the financial needs of consumers. From the perspective of any DIY investor holding a typical a portfolio of Isas, having a choice of up to 2,400 funds with no initial charge plus no charge for buying, selling or switching funds within your Isa, is extremely good value.
In fairness, advisers are there to cater for clients who are not into the DIY scene. In that regard, Hargreaves’ proposition is a reasonable one on charges: 2 per cent for “complex financial planning” on the first £200,000, reducing thereafter. For discretionary advice, the charge is 0.365 per cent plus VAT annually, or 1 per cent for investment advice.
None of these are out of line with most of the IFA market and significantly cheaper in a number of cases I have come across. Of course, total costs depend not just on the IFA’s own charge but the fund manager’s fees. Some IFAs feel that Hargreaves is “bulking up” on the total charges payable by not broadcasting the fact that it takes a share of the fund management fee as well.
So should advisers be arguing in favour of fixed AMCs?
I don’t believe they should. In that respect I find myself agreeing with Gorham for two reasons. The first is that he is right: a “cosy norm” will work against consumers able to do their sums and choose the right package for themselves.
Second, advisers should ultimately be selling a combination of advice and ongoing service, with true “value” determined by the quality of the two.
Complaining about Hargreaves’ business model, or trying to affect it by imposing universal charges is like putting weights on a runner to hold him back.
That said, part of the problem is that unless there is some sort of commonly recognised and standardised comparison of total annual costs, the separate but parallel issue of how to relate them to an IFA’s service and advice proposition remains unanswered.
Until then, consumers will find themselves asking the same questions about fees and charges – and the joke, if that’s what it is, will be on them.
Nic Cicutti can be contacted at firstname.lastname@example.org