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Nic Cicutti: Hargreaves is right about AMC fixes

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



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. I doubt anyone would argue against free market competition that benefits consumers. What possible case could be made so lets assume thats accepted by all. And IFAs could benefit enormously from greater complexity and our role in analysing that for clients who need it done, so Im certainly not arguing from self interest here.
    But, 2 cautionary points: the utility industry had overcomplicated tarrifs and multiple consumer options that eventually became so confusing it had to be reined in by regulation – some caution needed therefore.
    More importantly, the ability for consumers to move assets easily and free/cheaply is surely essential in terms of a competitive market (and a TCF cornerstone I think?), so I hope that the regulator rapidly insists that re-registration MUST be solved if a fund group chooses to offer multiple charging versions of essentially the same clean unit class per fund, however that is achieved.

  2. Incompetent Regulators 25th April 2013 at 1:05 pm

    What HG has managed to do is fool everyone by loading up the AMCs and by not producing illustrations for all their business means that no one knows what effect their charges have on clients funds.

    The company don’t make millions from nowhere, they’ve just made everyone believe they are paying less when in fact most are paying more for less!

    Now they have the momentum on their side they can do what they want.

  3. The pressure is on the Fund houses to decide what game they want to play. Ultimately, if one platform or wrap negotiates a better fee structure for its clients then others will surely have to follow suit to a level where they beleive is reasonable. The ‘market’ will ultimately decide as is preferrable (let’s not forget its the clients who must benefit!). I suspect the outcome will lead to the Fund houses having to insist on the same AMC for all it deals with for that particular fund. Whether the clean Fund A should have the same AMC as clean Fund B is wrong. Fixed AMC’s are not in the best intetrests of cleints but to have different AMC’s for the same fund, accross a plethora of platforms would be rediculous for clients, advisers and the fund houses. So, its important to differentiate between what we say when we think of fixed AMC’s.

  4. It’s an interesting argument – yes competitively negotiated low cost TERs is in the consumers best interest BUT if that results in an inability to easily switch providers should the need arise, then it could be to the clients detriment.

    As Paul above also indicates, cost is important, but if cost savings result in higher charges elsewhere (i.e. as a result of more intricate work) then the end result might be higher overall costs despite the TERs being lower.

    What clients need is transparency, cost effectiveness and an ease of administration. Unfortunately, since RDR the latter seems to be heading in the wrong direction and I’m waiting to see what happens with the other 2!

  5. If Invesco Perpetual told Hargreaves, Standard & Skandia to get stuffed, it will have no influence whatsover on their inflows, because their funds will be bought anyway. This, I suspect, is why we will see no super cleans. I also suspect that this scares the life out of Standard Life/Hargreaves because they will have to reduce their charges to remain competitive. Did someone mention that Mr Hargreaves sold £50m worth of shares this week, I cannot think why!

  6. Some very valid points made by all. However, there is the issue that HL wish to be able to negotiate terms for their benefit not the clients. I am all for making a reasonable level of profit but when the effect of the deal is to increase margin for the retailer whilst continuing to increase market share does smack of greed for shareholders without the best interest of the customer at heart. If the customer gets wise to this they may not be so loyal – Apple is a prime example.

    Also is a fund group applying TCF?

    Finally observation and a point well made over re-registration if fund groups do have different AMC’s applying for different platforms, perhaps we should encourage clients to HL and then re-register their holding to a platform with a lower overall charge and retain the benefit of the cheap AMC units that HL negotiated.

  7. Sorry Nic but you and Mr Gorham are both wrong and I beleive being insincere.Steve O is quite right ,HL and Skandia both want to be able to do large discounts not for the clients benefit but to both give them an edge in the market and bolster their profits.How does all that equate with TCF?If all TER’s are the same the the only difference from the clients view are the providers fees and the customer can then make a true value comparison,as it is they want the smoke and mirrors to continue despite RDR being designed to stop that.
    As ever the regulator will no doubt turn a blind eye to such practices ,as they do with SJP.What you need to be asking the regulator is why,now that would be proper investigative journalism .

  8. You’ve missed the point Nic. HL don’t want lower cost funds. Look at the Wealth 150 list of funds they push, no lower cost funds or investments to be found there. What they want is simply funds that cost more if bought from their competitors so that HL charges, which will be much higher than their DIY rivals if they are to maintain their high margins, don’t look so uncompetitive.

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