I’ve spent a lot of time thinking about platforms and their fees over the past 12 months. Yes, perhaps lockdown has got the better of me. But I increasingly question the extent to which Hargreaves Lansdown (HL.) deserves its market dominance.
In its defence, Hargreaves has done great things for private investors in the UK. The platform has a market share of over 40 per cent with 1.5m customers, many of whom have transferred from much more expensive services over the past four decades. It has an impressive, easy-to-use website with lots of content, an extensive product range and has taken steps to simplify and reduce its fees over the past couple of years.
However, as competition from rival platforms gets stronger, it is worth scrutinising what exactly Hargreaves offers. First, take the fund fee. A 0.45 per cent annual fee for most customers is higher than its closest competitors. Often Hargreaves offsets this, as it is so influential that many fund managers cut their fees to have their funds available on the platform. While lower fund fees benefit customers, the platform is, to an extent, charging its clients a premium for its bargaining power.
Next, take the sharedealing fee structure. £11.95 is the standard dealing fee for listed securities, but if you deal more than 10 or 20 times in a month you will pay £8.95, or £5.95 per trade respectively the following month. Does this feel a bit arbitrary? It’s not difficult to imagine times when you will want to make a number of deals – but not continue that into the following month, which means you would not get the benefits. It is not the only platform to take this approach, however, AJ Bell Youinvest and IG do too, albeit with lower dealing fees. interactive investor has a different approach of giving one free trade per month to all customers.
The result of Hargreaves’ set-up is huge profit margins. Indeed, this week the platform announced it expects profits before tax to beat analyst expectations for its year end (30 June) following elevated dealing volumes. The good news is that it is financially sound – what you want from the broker managing your money. But an operating profit margin of 66 per cent for the year to 30 June 2020 might make users question if they are paying too much. AJ Bell, which has fewer customers and broadly lower fees has an operating profit margin of 39 per cent.
Hargreaves has prided itself on outstanding customer service. True, its website frequently wins accolades for being the best available, and its client retention rate of 93 per cent suggests its customers are happy. But recently the platform has struggled to maintain standards amid a surge in customers and a drop in productivity owing to remote working. Our own testing found its telephone response times to be significantly worse than its competitors.
The platform was also rocked by technical issues last November following a spike in trading after positive vaccine news. System outages occurred across most of the major platforms on that day, suggesting more investment is needed in operational resilience across the board.
And let’s not forget Hargreaves’ role in the Woodford debacle. While not the main party at fault, Hargreaves was a cheerleader for Woodford, negotiating a special fee discount and keeping the Woodford Equity Income Fund on its 'best buy' list right up until the day it was suspended (Bestinvest, Charles Stanley Direct and AJ Bell Youinvest all dropped the fund from their lists in 2018). Some 290,000 Hargreaves customers were directly or indirectly exposed to the fund when it closed. The 'Wealth 50' list has since been revamped.
For investors tempted to switch platform, we explain how to smooth the transfer process here.