Wednesday 1 September 2010

The low fee mantra – a look at the results of Hargreaves Lansdown

Firstly an apology to regular readers of Retirement Investing Today. My life outside of this blog has recently become extremely busy. It’s going to take me a couple of weeks to get everything sorted out which unfortunately means for the next couple of weeks posts are going to be very sporadic if I manage any at all. Please bear with me as once everything is back in control the regular posts will reappear.

Now onto the topic of today. My investing strategy is in my opinion quite simple. It is largely strategic asset allocation, with some tactical asset allocation thrown in for good measure. This tactical asset allocation is centred on adjusting my equity weightings depending on cyclically adjusted PE ratios (CAPE or PE10). I follow 3 PE10’s – the ASX 200 , the FTSE 100 and the S&P 500 actively and invest based on 2.

On top of this I am obsessive about minimising fees and taxes. When combined with compound interest I believe they are a killer. For example I minimise annual charges, carefully consider any funds that have upfront charges and trade very infrequently. If you are interested in the damage fees can do then here is an investing mistake I believe I made in the past. Also I need to always remind myself that I am trying to minimise fees and taxes not fees or taxes.

Today I have about 65% of my low charge portfolio invested tax efficiently and my fees on average are at 0.58%. I even think 0.58% is high but I am struggling to reduce it largely because I am stuck with my employers pension scheme which while having many benefits in my opinion it also comes with the big negative of high fees.

I recently posted about the opportunity I may be getting to set up a low cost SIPP with the current pension pot that I have. This included an in depth look at the Hargreaves Lansdown Advantage SIPP, Sippdeal SIPP and the Alliance Trust Select SIPP. Hargreaves Lansdown were quickly eliminated as a place for my money as I believed that they wouldn’t provide me with a low cost SIPP for my investments. Sippdeal and Alliance Trust both have pro’s and con’s but I believed I could run either of these SIPP’s for 0.3% to 0.38% per annum. This would then significantly reduce by total portfolio costs.

It was therefore interesting for me today that Hargreaves Lansdown announced their 2010 preliminary results. It appears as though many people out there disagree with me about Hargreaves Lansdown. Or maybe they are just on average not worried about fees. Of course they offer more than just pensions but my 0.58% portfolio cost also includes ISA’s and of course non-tax efficient investments (100%-65%) of 35% of my portfolio. They also offer financial advice (and other advisory services) but in my opinion this cost must also be counted towards the total cost of running your portfolio as in the end only one person ends up paying for it, the customer. It’s therefore interesting for me to compare my portfolio costs with those of the average Hargreaves Lansdown customer. My analysis is by no means perfect because I guess some people will pay for advice but invest elsewhere making my approach very much worst case however hopefully it demonstrates a point. They currently have £17.5 billion of assets under management. From this they generated revenues of £159 million. This means the average customer is paying 0.91% of their portfolio to Hargreaves Lansdown per annum. Don't forget that's not the total charges to the customer either because if he buys an ETF or some other fund he then has to pay an annual charge on this also which goes to whomever the product provider is. That sounds like a lot when compared to my 0.58% which I am working hard to reduce further. Of course my percentage is a little higher as this is only my annual management cost. I also do the odd trade however even considering this cost it probably would annually only add a further 0.05% or so.

Now the interesting bit. On that £159 million they made an adjusted profit before tax of £90.7 million. That is an adjusted operating profit margin of 56.5%. I’m sorry but given the industry I am in I find that a very large number! Instead of huge profits let’s hypothesise that instead they want to make a ‘fair’ profit and also look after their customers investing interests by minimising their fees. In my line of work a ‘fair’ profit is say 10%. For this they add 10% to their costs of £68.3 million to arrive at £75.1 million of revenues. With £17.5 billion of assets that would only be total annual charges of 0.43%. That sounds a bit better to me!

As always do your own research.

10 comments:

  1. "It appears as though many people out there disagree with me about Hargreaves Lansdown. Or maybe they are just on average not worried about fees."

    I think it's the latter, or more likely ignorance of the latter. Despite investing books and blogs banging the drum of low fees the message doesn't get out to everyone.

    I'm enjoying your blog btw.

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  2. Hi Dan

    Yes I agree with you. I think people see for example 1% and 1.5% and think they are both similar. It's only 0.5%... They don't understand compound interest and the effect that small difference has in the long term. It really is a shame.

    BTW welcome to Retirement Investing Today.

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  3. Yes, agreed. Managed fund charges are best avoided by avoiding managed funds! ETFs have to some extent made them unnecessary, although inertia has so far prevented me from putting my words into practice. But some people, I suppose, will always like the idea of having an "expert" look after their money.

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  4. Bravo in your mission to reduce fees. Have you looked at transaction costs for the funds you own? I was considering investing in a bond etf a while back, but it was so religious in tracking the entry and exit of individual issues that its performance lagged the index by something like 3% per year! I know stocks are more liquid, but for a large etf there must be some costs for trading out/in as index components change?

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  5. Great point Sparky.

    How do you personally determine transaction costs? It's my understanding that the TER does not include transaction costs so you can't spot it that way. The only way I check it currently is by finding funds that look to closely track the benchmark index. Do you have a better way?

    BTW this is an intersting article on the topic http://media.vanguardinvestments.co.uk/article_display.cfm?article_id=20

    Cheers
    RIT

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  6. Tiny side note: in previous years, Hargreaves Landsdown have made a significant amount of money from interest on un-invested cash, which I presume they take a cut of. Rates probably too low to play this game right now though.

    You are much more obsessive about fees than me - I wouldn't worry about 0.58% versus 0.65%, by that point I'd be looking to other factors (security, customer service, whether the ETF is synthetic or not, etc).

    But I do trade and other sorts of evils, as you know, and if you go fully passive I quite understand the focus!

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  7. Hi TI

    Good point about interest on un-invested cash. Interest being offered on Vantage Portfolios today is:
    - £0-£999.99 0% AER
    - £1,000-£6,999.99 0.05% AER to this tier only
    - £7,000-£49,999.99 0.10% AER to this tier only
    - £50,000+ 0.25% AER to this tier only
    So I'm guessing they could have all that cash sitting with a bank somewhere earnings 2.5% or so giving them plenty of free profit for essentially nothing.

    I agree I'm probably obsessive about fees. I just work on the principle that every fraction saved is a fraction that compounds up for me and not someone else. I was always taught if you look after the Penny's the Pounds will follow and I guess it's just a continuation of that. Agree with you on security, synthetic etc though. Although I find it quite difficult to read all the small print and understand everything. Generally I just try and spread it around. My pension provider (including my new SIPP provider if possible in the future) is different to my ISA provider. I use a couple of ETF providers. Reasonable amount tied up with NS&I. Finally money held outside those tax shelters is with yet another provider. If we had a big failure sometime in the future I'm sure I'd probably lose something in there that wasn't ring fenced within a trust or similar but hopefully it would be recoverable.

    Cheers
    RIT

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  8. I think its quite hard to do. Indices by definition include no transaction costs, but when you buy and sell bonds you often pay something like 5% spread on the transaction.

    I think the only way to tell is by looking at past performance of the tracker vs the actual index, and look at the difference in performance over say 5 years. This blog post has some more information on the example I was talking about:
    http://www.mymoneyblog.com/fidelity-us-bond-index-fund-fbidx-trying-to-beat-the-benchmark.html

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  9. Really pleased I've found your site. You are doing some very similar things to me albeit much more in depth in some cases.

    My main mission at the moment is sorting my pension as low cost but with investment choice I want. I moved to Hargreaves this time last year after getting stung by an IFA. I really like their platform and I think for regular contributions to HSBC trackers this is about as low as you can get (0.27-0.37%TER), plus no switching fees etc. I am currently battling with my taste for the lure of high return specialist sectors though (India, Emerging markets and commodities) and so haven't really got my TER down as much as I need too.

    The issue I have is that HSBC trackers are great but finding a low cost FUND options for the above (EM, Commodities) and also bonds very tricky. Getting easy access to TER information is difficult without lots of trawling tables. I currently find Royal London do a Index Linked Guilt with about 0.4% TER and Investec have Strategic Bond about 0.85% but these really shouldn't be that high. These plus a minimum 1.5% for Emerging Markets and this bumps up my fund average TER. So I have recently been looking at the option of Alliance Trust but have yet to find out the regular charges as they recently added initial dealing charges to all investments (inc. FUNDS) I think of £10 (maybe £5 for regular) which I don't like the sound of. I think a lump sum of at least £16000k into bond funds knocks the annual charge off, but I think I really need to put some numbers into an excel spreadsheet so find out long term cost savings.

    I know ETF's offer low costs but you have to be putting in lump sums and not really trading to benefit from the low costs. I really need low cost regular contributions as this is my only pension. This is thing I hate about HL is they have the cheek to charge 0.5% on top of any shares, ETF's and investment trusts.

    Any help with formulas would be great.
    Hopefully I can help more with my findings later on.

    Cheers

    George

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  10. Hi George

    Thanks for the detailed response.

    For me personally H-L is not low cost enough for what I am trying to do. I've settled on Alliance Trust or Sippdeal as options for now. Have a read here http://retirementinvestingtoday.blogspot.com/2010/08/lowest-cost-low-cost-sipp.html where I detailed everything that I'd found so far.

    I typically am using my ISA to hold my Emerging Markets Equities. This is because my current pension has astronomical TER's for EM's. I'm currently buying XMEM with a TER of 0.65% in my ISA. Lemondy here http://retirementinvestingtoday.blogspot.com/2010/08/adding-more-emerging-markets-equities.html also gave some good reasons why IEEM might be a better option though. With Alliance Trust and Sippdeal both of these could be bought from what I can see.

    For Index Linked Gilts I'm looking at iShares INXG which has a TER of 0.25%. Again ok within Alliance Trust and Sippdeal from what I can see.

    For commodities I'm now only buying physically backed gold ETF's for the reasons I outlined here http://retirementinvestingtoday.blogspot.com/2010/04/investing-mistakes-ive-made-contango.html An example is you can get PHGP with a TER of 0.39%.

    As I am saving large amounts of money each month (60% of gross earnings typically), in my quest to "retire"in 5 years, it is the TER that tends to have the bigger effect for me rather than the dealing charge. Similarly I suspect annual fees have less of an effect for me than for many others as my pension pot is now quite substantial.

    Also I won't be trading within the pension so dealing charges will have less of an effect. For rebalancing purposes I will try and use my new contributions into my employers new (which is not low cost) pension fund that I will be moved into rather than trade within the SIPP. This is because while not being low cost it has no buy/sell spreads and no dealing charges so I might as well make the most of these little benefits.

    Would love to here your findings as you work through the pensions maze.

    Cheers
    RIT

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