Tuesday, 12 November 2013

Would you buy a car not knowing what you are paying for….

When I started this blog and twitter feed I wanted to provide some education and also highlight areas of interest. One area that remains a concern is the apparent disparity between how advisers are priced and how direct platforms are priced. 

We have been eagerly awaiting Hargreaves pricing and this has been put back, again and again. This is interesting because how they communicate this is really important. 

At the moment if I buy a fund from Hargreaves I might pay 1.35% p.a. The way the marketing goes is that effectively investing via them is free and actually if the fund price was 1.5% p.a. then I am getting a discount of 0.15% p.a. 

The reality is that Hargreaves receives a rebate up to in some cases 1% on funds, part of this they share and part they keep. And why shouldn’t they, effectively you don’t build a business out of nothing (as can be seen by the bubble). 

The challenge they face post RDR is that charges have to be transparent and also they cannot bulk convert clients to a clean share class where they are worse off. Equally I am not sure of the rules on this but I assume if the clients are better off under the clean share class they should be offered the ability to switch.

So this then starts to create a problem. Hargreaves have announced they will not bulk switch clients to clean share classes because clients need to make that decision themselves. The press article gave an insight to their future pricing model because they state the position will be the same whether the client is in clean or bundled share class.

This now tells roughly where the pricing will come in – take the example. If the clean share class is 0.75%, then the Hargreaves fee will be around 0.6% p.a. 

The challenge for them is that now people are going to be able to see what they are actually paying and the question is like with financial planners whether they see value in that charge. If it comes in around 0.6% p.a. when there are operations like who charge £20 per quarter, which is better for the client? Remember Hargreaves have been vocal on the impact of charges. If you take the Hargreaves average fund value of £40,000 this is equivalent to 0.2% p.a. on the iii model but obviously goes down as the fund value goes up. 

Effectively people have been buying a Hargreaves product without knowing what they are paying for, if the statement is correct then the charge is high compared to other models. This is a challenge, they are good at what they do but so are others who offer the same at less. Don’t write off Hargreaves but equally don’t ignore this statement because lots of people have.

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