23 May 2014, 12:43pm
personal finance:
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  • The subtle way Hargreaves Lansdown make their money

    One of the things I rather admire about Hargreaves Lansdown is the slickness of their operation. It’s a full-service shop, and the Ermine is nowhere near rich enough to fly First Class, use valet parking, or invest with Hargreaves Lansdown.

    Managing your income is an excellent way to stop feeding the Beast of HMRC – as a PAYE grunt paying the mortgage there were only limited ways I could do this, basically pension AVCs and employee Share Incentive Programmes though the latter were only good for sheltering about £1.5k from tax a year. However, it means an Ermine is now sitting in First Class of the investing platform world albeit with a cattle class ticket, and I get to see how HL works.

    One of the things you notice about First Class 1 is that paper is king. Ditto with HL, so the Ermine has this lot on the dining table -

    A single mailing from HL

    A single mailing from HL

    I recently read this article in the Grauiniad, which chimed in with the book Authenticity: what consumers really want I read from the library a while back, that we are increasingly being sold lifestyles rather than specific products. I’m still not sure whether the Grauniad article is really insightful or absolute bollocks, but anything that makes me think has been time well used IMO. A great quote is

    This is how capitalism, at the level of consumption, has integrated the legacy of 1968, the critique of alienated consumption: authentic experience matters.

    And I thought of that when I looked at this wodge of HL stuff. Clearly HL targets their advertising a people of a certain age, preferably people who have more money than I have and therefore can afford to not look a the price ticket too much :) One of the things that struck me is that it’s all about funds. For historical reasons I’ve never been that much about funds and the way the whole market is going I am going to get out of funds all together, because they induce platform fees whereas so far you can avoid platform fees on things like shares and ETFs. Not only that, but funds seem to offer the opportunity for all sorts of indirection and fees upon fees. This is clearly how HL operate. Their fundamental platform fee is 0.45% 2  – bearing in mind the long-term return form stocks is typically estimated at ~5% you’re paying a 10% income tax right off the bat, just for being there. The reason I have left my money there as cash is that this fee doesn’t exist for cash, though obviously you are paying the government about 3% inflation tax to manage the money supply for the benefit of mortgaged homeowners to depreciate the currency ;) However, since they are giving me back a load of tax I paid in previous years I can eat that.

    However, riffling through the HL paperwork, this is clearly a fund shop, and the fee loadings on the funds are usually over 0.5% so you’re looking at fees of over 1% just to be in the market. Annually. The Ermine is just not used to the concept of being rushed each and every year just to exist. But the words are warm, in the typical vapid style when talking about the unknowable future. Everything is good, and if it isn’t, it’s suffered a temporary setback and is an excellent buying opportunity. There was one chart that made me sit up and go WTF, which was the chart of the UK stock market by CAPE

    The UK stock market - good value right now

    The UK stock market – good value right now

    Now I look at that and think bloody hell, the reason I haven’t yet sorted out what I am doing this year is that the market looks on the upper side of the good value line to me. Better people have suggested that it isn’t so much the headline FTSE100 price level but that earnings are improving, but nevertheless I’ve still got some feeling for the WTF are we doing up here mate fellow, though it’s not as bad as it was maybe. That’s why I am looking at emerging markets, and Russia still draws me, with their PE of 5 nowadays, but I still can’t get my head round what exactly the meaning of the word ‘ownership’ is in a Russian context ;)

    Anyway, the UK stock market – good value by historical CAPE? There are three things wrong with that. The first is look at that great big spike from the mid-Nineties up. That, my friends, was called the dotcom boom. Everybody was charging around like blue-arsed flies buying anything with internet in it. Then anything with www. then any company with an e in the name. Seriously, it was a real case of the madness of crowds. Everybody’s brains fell out on the floor and some people are still looking for theirs fifteen years later. I was there. It really was that mad. I made about quarter of my gross salary in the run-up. And lost half in the bust ;) The training was excellent value, because I learned not to buy into momentum. You will run out of greater fools, because in general you are one of them.

    Just like Mark Twain said about the unique learning you get from carrying a cat by it’s tail 3there are some things you have to do to learn things in a way you can’t learn any other way.

    A man who carries a cat by the tail learns something he can learn in no other way

    Same with the madness of crowds, You gotta be in it to know it. The trick to success is to retain that knowledge  for future use. It’s always a fight…

    If we lop out that piece of irrational exuberance, the chart doesn’t look quite so wild, and there’s also a general downtrend, possibly because the power-shift from the West means the market may be prepared to pay less for any given earnings because it suspects that profitability is falling. After all, with the level of debt both personal and national, where’s the money going to come from to buy your stuff 10,20 years down the line? We can’t all keep borrowing from the Chinese ;)

    Standard Deviation? On Stock prices? Mr Gauss would not approve, m’lud

    The second thing wrong with this is that the trouble with using things like standard deviation on stock prices is that stock markets do not obey the central limit theorem. Mr Market is not a collection of independent random variables, and every so often everybody decides “Holy shit, the world is going to end”. On the flipside, we all sometimes decide that it’s all different now and we have reached a plateau of permanently increased productivity, which leads to irrational exuberance about stock prices. In priciple a government can row back against that by increasing interest rates, but on the other hand they can promise all sorts of Good Stuff to the electorate to get re-elected. Any resemblance to Help To Buy is of course purely coincidental. As a result, the distribution is fat-tailed and is not typical of a normal distribution, so using standard deviation of a normal distribution is iffy. Companies got into hot water with their value at risk calculations because they were seeing events that typically you’d only expect to see in longer than the age of the universe – in about ten years. It actually staggers me, that, in trying to substantiate this paragraph, I discovered people really did use the normal distribution as the model for financial markets.

    I am sure that once upon a time, the level of general and scientific knowledge in the West was widespread enough that it would have been obvious what was wrong with doing that to people in a professional organisation. We seem to search more and more for stupid metrics and valueless numbers rather than seeking knowledge. The world is complex, it’s messy, and one size rarely fits all. The abuse of the scientific heritage of the West that this represents is shocking. This is not new stuff – Carl Gauss died in 1855. Mind you, to my shame I only scored a lousy 5 on the Grauniad’s science quiz so clearly the rot is spreading. But I’m not in charge of shedloads of other people’s money.

    Have you ever seen what happens in a mass of humans when somebody yells Fire? They all lock into each other and start running the same way. That is not a canonical example of a set of mutually independent variables acting individually, so the central limit theorem breaks down. In crises – at the very time when you need your model to work to qualify the severity of the problem. Maths doesn’t help you in dealing with human emotion.

    The third thing wrong with that chart is the data source: internal, with the data set from Jan 1974 giving a veneer of respectability to something that, basically, HL could have made up entirely. And since they benefit from shifting your cash into their funds there’s always the temptation. You can’t validate that data against anything. HL might well have said “trust me, I’m a salesman”.

    I have nothing but admiration for HL

    HL did serve we well when the Chancellor decided to improve the usefulness of DC pension savings no end - just before the end of the tax year! So I needed a place to stash £2880 with a pension firm, pronto, and HL were the only people who managed to open an account and take the money, within a week. TD, my current ISA provider, demanded proof of identity through the post, because their system isn’t joined up presumably, and Cavendish were also after that.

    Now the ermine is not a million years away from getting my hands on that money back, and in a rare turn-up for the books, I can claim back 20% of the tax I paid on earning that money – by simply leaving it with HL and HMRC will add £720 to my £2880. That’s an effective interest rate on cash of about 12% (it’s amortised over two and a bit years) and I can do the same next year and the year after that, for an interest rate of about 20%. I don’t know about you, but I sure as hell don’t know anywhere you can turn that sort of interest rate on cash. Okay, so it is only the money stolen from historical pay packets being returned to me, but it’s worth shifting an Ermine paw and banking with the might of SIPP rather than the Nationwide. I stand to win about £2000 back from HMRC. The trick, of course, is to manage one’s income and make sure I don’t have any when I hook this cash back out – it’s about £10800 which is currently above the personal allowance, but you can get 25% of it tax-free. By living on this for a year I get to defer my main pension, too, which goes up by ~5% each year I defer. Although actually 4% since HMRC will be tapping me for tax- I’m tempted to save my taxable part of the pension into a SIPP to reduce the tax on my pension to 15% since I can manage the cash-flow. The main challenge is having enough cash reserves to keep loading my ISA allowance each year, which has suddenly got a bit harder with the increased allowance. I may consider taking out an cash loan for the last year, if anybody will lend me some money, simply to fill up that ISA allowance. 4

    The Ermine has been freeloading on the money that fund investors have been putting in for years when it comes to the costs of running a platform. I don’t need the lifestyle stuff, but I’m happy for it to pay for my seat on the boat. Most of HL’s customers have a lot more money than I have, so every so often they may see the flash of white fur and a small black tip to the tail scurrying about, but in the end it’s the rake of their wealth that is keeping this ship afloat and in good condition. I salute my well-heeled fellow passengers and raise a glass of proscetto to their choice of lifestyle, if not their quest for value for money. Perhaps the Guardian article was right. When you have enough, you don’t need to seek value for money. The quality of the ride may matter more. HL is selling an experience – giving you the warm feeling

    “You are a wealthy sort of chap, probably a chap, probably 50+. You are knowledgeable in the ways of the world, so here is a shitload of complexity and a teeny bit of salami-slicing of fees. Needless to say, an experienced individual of your calibre has the savvy to make shitloads of money from these fine opportunities despite the fees, so take it away from here. For those of you into shares, we now offer real time live share prices, so you can ride the markets like a pro. Come on in”

    And they do – HL is apparently one of the biggest retail investment platforms in the UK.It’s a slick operation, and probably a nice ride. just not the cheapest. Except for their okay 0% rate on cash, which will do me fine. I live in hope that the new NISA integrated accounts will actually pay you a return on cash, but it’ll never approach the HMRC rate on a SIPP.

    Notes:

    1. I’ve never flown First Class, though I flew Business class enough for work, and you got a lot more bumph there too compared to cattle. But it’s a long time since I have boarded an aircraft – not because I can’t afford it but the experience is so horrible and I get to hate my fellow humans so much for their screaming brats and inability to follow written instructions holding up the queues. So I really try not to do that to myself, or them.
    2. capped at £200, corresponding to an account value of £45k. Now my ISA is more than that, but I don’t currently pay £200 to TD to hold it. I checked last year’s statement and my platform fee was £2.31, so HL are 8600% dearer. In fairness, I made 9 purchases and zero disposals, and HL are 65p cheaper on share purchases, so the difference of £5.85 should be added to TD. So HL is only 2450% dearer than TD, a much more manageable difference for some chrome trim and a slicker operation, no?
    3. I suspect he didn’t say that directly, it is a paraphrase of  Tom Sawyer’sa person that started in to carry a cat home by the tail was getting knowledge that was always going to be useful to him, and warn’t ever going to grow dim or doubtful” but I’m damned if I’m going to surrender the thought picture on the altar of technical accuracy.
    4. You should never, ever, borrow money to invest in the stock market. However, I have a large AVC fund that is in cash and can come out when my main pension commences. So I am not borrowing money I don’t have, I am borrowing money that I can’t access yet. If you want to borrow money to invest then you may as well go into spread-betting.

    Are you saying you’re not the sort of first class person who wants a CROSS pen set worth £125?

    23 May 2014, 4:06pm
    by Neverland


    I dunno I think with RDR a lot of people are gonna realise they are paying HL £000s a year for a log-in, a few brochures, a tabloid size investment newsletter four times a year and sixmonthly statements through the post

    Previously, pre-RDR, a lot of 50+s thought they were getting that stuff for free from HL

    Looking at a lot of the personal finance press they are losing a lot of high value customers right now to flat fee brokerages

    Which is funny a their latest IMS is still showing them growing

    Personally I can’t help feeling the good times are gone for that company

    History is full of companies making fat margins for no justified reason that suddenly run into low priced competition

    E.g. Tesco v Aldi

    Maybe Im just tight tho

    HL ISA is capped at £45, except for fund holders

    SIPP is capped at £200.

    AT that level ISA looks ok to me for stocks, ETF’s etc

    John you are very mistaken. HL ISA is uncapped for all investments.

    They charge 45 pounds for funds which is capped and 45 pounds for ETFs, ITs and shares which is capped.

    They then charge 0.45% on all your holdings up to a million pounds at which point it is slightly reduced.

    I am extremely annoyed by he HL charges which have seen my annual fee go up 10 fold.

    Then they charge /

    23 May 2014, 11:47pm
    by dearieme


    But it’s such a breath of fresh air when the phone is picked up by some intelligent young jigger who engages with your question. Who will even phone you back if a good idea occurs to him later.

    Seriously, their piles of bumf are absurd, and “funds” are not for me, but they lay on a fine service which has done well by us for our rather modest sums. It probably helped that for some years they mainly held the “conservative” part of our portfolio i.e. cash.

    By contrast our one attempt to use TD ended in fiasco, and we’ve found the ATS website dire. Perhaps iWeb next?

    Marco

    That’s not what their website says.

    - 0.45% on funds is uncapped, hence the tiers

    - 0.45% on shares, ETF’s etc is capped at £45 (or £200 for SIPP’s)plus dealing costs, obviously.

    - if they are charging another 0.45% on top it is not explicitly disclosed on the site

    24 May 2014, 11:06am
    by Jonathan


    “I salute my well-heeled fellow passengers and raise a glass of proscetto to their choice of lifestyle, if not their quest for value for money.”

    Well, anyone who’s drinking ham-flavoured wine has fairly questionable taste himself, surely? ;-)

    Still, good work on calling that CAPE graph into question.

    Shouldn’t we all be buying the shares of this well-loved enterprise?

    I wouldn’t worry about only getting 5 in the Guardian’s “science” quiz: I only got 7. (I got the baking, farming & astrology questions wrong. I did know the poetry question though! “Three quarks for Muster Mark!” :-) )

    Amusingly the average score of 3 is so poor we’re in the Poisson stats regime… The modal score of 2 is less than a trained chimp would score! :-D

    Mind you, at least it has some science facts questions in it, rather then exclusively history-of-science questions.

    Of course, real science is not accumulating facts, but producing tested theories. I accept this doesn’t lend itself to a pop quiz though!

    You’re bang on with the abuse of Gauss’ stuff. An amazing guy – He (independently) discovers/summarises least squares minimisation in a single paragraph, including warning that models may be incomplete here: https://archive.org/stream/theoryofmotionof00gausuoft#page/249/mode/1up . (I cited it in my thesis :-D)

    Much of economics is not even wrong. (i.e. it’s so far from reality one can’t even assess whether something is correct.) What’s worse, is that it’s not even wrong to two decimal places. People then act on this believing it means something. Much better to at least admit it does not.

    http://www.smbc-comics.com/index.php?db=comics&id=2060#comic

    I only use HL for some equities and ETFs. I opened an account just to get an alternative to TDD. I didn’t realise that were so heavily geared towards funds when I joined.

    Still a bit nervous about them since their attempt to impose a custody charge on ITs and, of course, they have exit fees.

    Still, the ride so far has been good.

    Ermine

    You have got HL nailed. Highly efficient service and marketing machine…for which customers pay handsomely.

    I found 2 big pitfalls with their fees / costs:

    1. The (hidden) FX spread they charge on trades in all overseas shares works out to be very expensive (many times the £11.95 dealing commission) on trades of any size

    2. Paying 0.45% to hold funds just makes them uneconomic in my view…this will just accelerate the move to ETFs….I use Vanguard’s

    @Jonathan Yup, even as an obligate carnivore there’s no case to be made for prosciutto prosecco ;)

    It’s an interesting commentary on the transparency of HLs charges that three customers can’t agree on the cost of holding investments with them. I’m reasonably usre about the cash rate…

    As for buying shares in the firm, well, it depends on what the proportion of Neverlands they have. Or indeed freeloading ermines and other small fry. Interesting the FX charge – I try and stay with GBP denominated funds even for overseas markets.

    @Greg what’s up with the lower than random score? Are there attractors in the questions to throw people off, or is it the imp of the perverse. Smart chap, that Gauss fellow, he’d be rolling his eyes at the VaR boys. Presumably the quants are aware of the issue, and it’s intervening management that yells don’t give me problems, give me solutions… Sometimes it’s better to know you don’t know, and roll dice. Rummy took a lot of flack for his layman’s treatise on epistemology and the known unknowns vs the unknown unknowns. We should have taken more heed.

    As for house prices, well, BTDT. Interestingly we are in the 1989 phase of their short history of British housing. Plus ca change – it was interesting to read that the early 1970s had the same pathology. Nobody will listen to this Cassandra. And in thirty year’s time, there will be another mustelid with slightly greying tips to the fur relating the story of how property can become an albatross to another bunch of disbelievers desperate to buy…

    @Barney – I’m likewise thinking of staying right out of the whole funds scene and preferring ETFs. Even spreading myself out in time, which used to be the big plus for funds it isn’t too bad. I generally buy no less than 2k lumps, so to get to HLs 45k share fees cap limit I’d buy at worst 23 lots paying £13 a go, ie £300 over three years in an ISA. Then I can sit on it for free. Or pay HL about £300 over three years to get there in the equivalent fund, then £200 each and every year. Well, thanks but no thanks, guys!

    25 May 2014, 2:39pm
    by Patrick


    Personally, I love HL. I tried the low cost platforms, but found them dreadful. I buy primarily individual shares, and not funds, so I probably like HL more than they like me. Their fees are quite reasonable — come on guys. My only critique of them is that they could cater to Dividend Growth Investors a bit more by showing dividend yields a bit more prominently.

    I use HL for my SIPP. I invest exclusively in investment trusts, which means HL charges me 0.45% capped at £200 p.a. Currently I only have about £12,000 invested, so I am a fair way from benefiting from the £200 cap (which would kick in at £44,444) — although I expect to hit that in about 5 years’ time, and go far beyond that over the next 30-40 years until my retirement.

    So, I’ve had a look at Monevator’s platform comparison table: http://monevator.com/compare-uk-cheapest-online-brokers/

    With my current small balance, a %-based broker would be best. However, once all the charges of other platforms are taken into account (e.g. some with flat rate fees on top of a % etc. etc.) HL seems to have mid-table fees. The cheapest I can find is Close Brothers, which charges 0.25% with no cap (and a lower dealing charge at £8.95), so that’d be best at the moment.

    When my SIPP value gets higher, it looks like X-O would then be cheapest for me at £114 p.a. flat fee and a startlingly cheap £5.95 dealing charge.

    I am, therefore, tempted by moving. However, there are two reasons why I am sticking with HL. Firstly, on a £12k investment split between nine investment trusts the costs of transfer would take a nasty wedge out my money (especially as I don’t think an in specie transfer would be possible).

    Secondly, I am funding my SIPP by making a regular partial transfer out of my current workplace stakeholder pension (I prefer my money to be in my SIPP due to the much better investment choices available), and I trust HL to be able to do this efficiently and with no unnecessary fuss and admin. I dread to think what a mess an ultra-low-cost platform would make of this relatively unusual type of low-value regular transfer.

    Are these good enough reasons for sticking with HL? I would be very interested by others’ thoughts.

    If you think HL charges are high I’ve just had my free follow up consultation from “the firm” W@W people. They quite happily manage my SIPP for a 2%+vat initial fee and 1.5%+vat annual charge (excluding any hidden charges). Since the budget these poor fellows are rushed off their feet with 3 consultations a day. I did wave him good bye as he drove off in his nice motor.

    I’ve recently set up a HL account for a family member and the charges are a bit of a concern. However, this is partly mitigated by the account already having a chunk of HL shares in it.

    29 May 2014, 7:10am
    by Tony Oldroyd


    Thanks for another thoughtful post. We seem to be treading a very similar path.

    I’m curious why your AVC’s are held in cash rather than invested. Is it simply to minimise risk before you can get access at 55? If so I have a similar concern, just paid up my company DC plan at 51 and wondering if I should remain invested or switch to cash. Currently have about a 50:50 bond/equity allocation.

    I’m trying to retain a balanced view of the future, despite reading too many peak everything blogs!

    Tony

    @Patrick, Alex, Westcountry – the article was about how I think HL generally make their money, and you’re all exceptions to their typical aim, which seems to be people with at least a six-figure sum on their platform largely in the Wealth 150 range of funds.

    They aren’t bad for smaller amounts, people who have mainly shares (because the fees seem capped lower). That’s perhaps the aim – to get the smooth ride without the first class ticket :) HL aren’t bad, but they are crafty in their literature steering people to their most profitable funds generating decent fees.

    @WDP well, someone has to pay for their work and it’s probably not all The Firm. The trick is making sure it’s not you!

    @Tony I’ve actually got protected rights so I could draw the pension now, and I am fortunate enough to have a FS pension which is a very similar proposition to bonds, so I hold no bonds. My problem is I saved up in AVCs pretty much exactly the 25% of capital value of my FS pension with the express aim of not having to commute any of the FS pension to get a lump sum.

    That means I can’t benefit from a rise in the AVCs if invested – anything over 25% would be taxable or I would have to convert to an annuity because of the Scheme rules. So I am prepared to eat the 3% p.a. cash depreciation to a total of about 10-15% loss until I draw the pension, after all I saved 42% going in and benefited about 20% from investment performance so I should be prepared to leave a little bit behind ;) Once I get hold of it I will invest into ISAs over a few years.

    That’s not comparable to your case, with a DC pension you can argue that, assuming you will continue in drawdown post-55 rather than annuitising, ie with your pension invested and only raking off the income needed, it should be retained in the same form as afterwards. Obviously you’ll take the 25% PCLS and presumably invest it in ISAs of a similar range of asset classes to your main pension reflecting your age, risk tolerance etc so that you don’t pay tax on that 25%, but that’s a question of wrapper rather than asset class. The thought experiment is “what is so special about the period of your life between 51 and 55, when you don’t have access to your pension, that makes it specifically good to be out of the stock market when you have been in it before and will be in it afterwards?”

    In my case it’s because I can’t benefit much from the upside, but can eat the full losses of the downside. It’s difficult for me to see the analogy in your case unless you are going to annuitise, but of course this isn’t advice, DYOR, there may be things I’ve missed etc ;)

    […] prep for extracting another slice of the action. The rake on Amazon Marketplace makes people like Hargreaves Lansdown look like public-spirited philanthropists -only 1.5% fees at HL compared to 38% at Amazon. And […]

    I am in the process of leaving HL mainly because of the SIPP fees of nearly £150 a month as well as 2 ISA’s for myself and my wife.
    I love the service and the website, but as a buy and hold investor do not think it good value any more and am moving to Interactive Investor. I dont think they give you the same amount of information except for the tie in with Money Observer. Moving a large portfolio is always a pain but I hope it will be worth it long term.

    @Simon Leaving HL seems the clear way to go, I guess iii scores with their £80 pa platform fees as opposed to as percentage. They are necky charging to buy/sell funds but as a BAH investor that shouldn’t be too much hurt!

    I keep expecting them to decide to charge me for holding cahs in their SIPP, but they haven’t yet ;)

     

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