- Uncapped fee structures can be very punitive over time
- Consider what products you hold on what platforms
A number of people have emailed me in the past couple of weeks about platform fees. It’s well publicised that the platform fees for investors in (unlisted) funds on Hargreaves Lansdown are higher than at a number of its competitors.
However, if you choose to invest in a listed security - including an exchange traded fund or an investment trust - in a normal dealing account then you don’t have to pay any annual fees at all (dealing fee is £11.95). Within an individual savings account (Isa), the annual fee is capped at £45 per year for listed securities and within a self invested personal pension (Sipp) that cap rises to £200 per year. This is competitive.
AJ Bell has a similar set up, although the fund fee is 0.25 per cent per annum for the first £250,000, compared with 0.45 per cent for Hargreaves. Fidelity Personal Investing has a similar model, and some platforms simply charge a per cent with no cap across all products, see price table from our Isa supplement. interactive investor takes a different approach with a fixed fee of £120 across all assets for its Investor plan, rising to £240 for its Super Investor plan.
So, how does all this play out in practice? One reader tells me he has £800,000 with Hargreaves in a Sipp. His annual fee is currently around £720: 12 out of his 13 holdings are listed securities, and cost £200 per year. And he has one unlisted fund with around £120,000 which costs him an annual fee of around £520.
To illustrate the fee impact across platforms, we’ve crunched some numbers. As Dave Baxter points out in Investment trusts vs their sibling funds, there are a number of investment trusts and open-ended funds run by the same manager that have had similar performance. Note they are not the same - because investment trusts can use gearing and trade at a premium or discount to their net assets, they can be more volatile. But the implications for platform fees can be very striking.
For the sake of this analysis, I have decided to compare Monks Investment Trust (MNKS) and Baillie Gifford Global Alpha Growth Fund (GB00B61DJ021), both popular funds run by the same team according to a similar mandate (four of the top five holdings overlap). The former is an investment trust and the latter is an open-ended investment company (Oeic). While Baillie Gifford Global Alpha Growth has performed a little better over 10 years, performance has been similar.
Let’s say you invested £50,000 in each 10 years ago, within your Isa, and left it. I pick that number because it’s close to the size of Hargreaves’s average Isa account size (£48,500), and from our portfolio clinics I know that a number of you have individual fund holdings of that size.
The chart below shows how much you would have paid in platform annual account fees, each year, over 10 years, on the three largest platforms. It shows how costly the compounding effect of a fee structure that isn’t capped on a high performing fund can be. The three blue columns represent the charges paid on Baillie Gifford Global Alpha Growth, with the darkest shade (highest charge each year) representing Hargreaves. The purple and pink columns, showing annual fees for Monks on Hargreaves and AJ Bell, show how much less these two platforms charge for a listed security, and how you are not penalised for high performance.
In this example, cumulatively you would have paid Hargreaves about £4,482 for a £50,000 investment in Baillie Gifford Global Alpha Growth over ten years, £2,518 to AJ Bell and £1,200 to interactive investor (ii). The numbers are not exact because I calculated them as if charged annually not monthly. For Monks, in an Isa, the fee over 10 years for ii would be £1,200, and just £450 and £420 for Hargreaves and AJ Bell respectively.
It is reasonable that you might expect to pay your broker more for holding funds because it costs more to administer them. Shares are instead largely bought and sold through the Crest system rather than individual managers. But, as Phil Oakley put it when he wrote an analysis of Hargreaves Lansdown in 2018, “I’d be astonished if the cost difference between fund administration and shares administration was as big as implied in the differences in fees customers pay.”
When I showed Hargreaves this example, and asked for comment on how much more it costs them to administer funds than listed securities, its response was: “There are different costs to HL for administering different asset classes, and there are therefore different charging structures for clients.”
The reader mentioned earlier said “I've worked in the investment management industry my entire life (not as an investor) and I have never understood why the custody charge for a fund should be charged as a percentage and all other holdings a flat fee. There is no significant difference in cost to a platform of holding equities, bonds or funds.” He adds that his one fund is moving to AJ Bell.
At the end of June 2020, Hargreaves had £52.3bn held in funds and £34.3bn held in shares (including investment trusts and ETFs). interactive investor says it charges the same across both type of product because it does not want to discriminate on costs across product types.
Simply looking at the annual account fee does not tell the whole story. First, Hargreaves has discounts on approximately a third of the number of funds on its platform (some of these can also be found on other platforms, but many cannot). Hargreaves says the average saving across all the funds on its Wealth Shortlist, as a percentage of the original ongoing charges figure, is 21.9 per cent.
You also have to take dealing fees into account. Hargreaves doesn’t charge any dealing fees for funds, AJ Bell charges £1.50 and interactive investor charges £7.99 if you trade more than once in a month (for its Investor plan). For listed securities, while Hargreaves and AJ Bell’s account fees are cheaper, their dealing fees are higher than interactive investor's (£11.95, £9.95 and £7.99, respectively). interactive investor gives all customers one free trade per month, while Hargreaves and AJ Bell lower dealing fees the following month if you trade a lot.
Unsurprisingly, elevated dealing over the past year or so has proved very lucrative for platforms. Hargreaves’s net revenue margin (income received as a percentage of average assets) on shares in its last financial year was 0.43 per cent - up from 0.27 per cent in the previous one. The revenue margin it makes on funds has not dipped below 0.4 per cent in the past decade.
If you invest in passive products, for platforms where fees are capped for listed securities but not other funds, holding ETFs rather than regular unlisted tracker funds could save you a lot in fees. Note Hargreaves only has unlisted tracker funds in its Wealth Shortlist, but you might be better off finding an equivalent ETF.
The takeaway is that the right platform for you really depends on how you invest. If you only invest in listed securities and don’t deal often, Hargreaves is a good option. It still has the best website of any platform, I think it’s fair to say, but the gap is narrowing.
For many investors, cost is not the most important factor. We wrote last year about platform functions you need to work. But given platforms serve the function of helping to preserve wealth, it is important to keep tabs on what you are paying.