Saturday, 27 May 2017

Why I won’t be using Vanguard wrappers


Vanguard has recently announced that in addition to the ETF’s and mutual funds (OEICs) currently offered, they will now offer a selection of wrappers to hold them in.  Given one of my mantras is to always minimise investment expenses and given Vanguard’s low cost reputation this should be a great thing.  Let’s take a look.

Firstly, let’s look at my SIPPs.  I have two – one from Hargreaves Lansdown and the other from YouInvest.  Over the years, despite pushing the actively managed variety through schemes like The Wealth 150, Hargreaves Lansdown have made it unattractive from an expense perspective to hold mutual funds in a SIPP wrapper.  The first £250,000 attracts a charge of 0.45%, the next £750,000 a charge of 0.25%, the next £1,000,000 a charge of 0.1% and above that level there is no charge.  In contrast shares, investment trusts, ETF’s, gilts and bonds attract a flat charge of 0.45% but importantly it’s capped at £200 per annum.  This meant that when I first started transferring my expensive employers insurance company based Group Personal Pension (GPPP) into Hargreaves Lansdown I went straight for direct shares (REIT’s such as Hansteen, Segro, British Land, etc) or ETF’s (VERX, ISXF, VFEM etc).  I currently have a little over £250,000 worth of wealth in my Hargreaves Lansdown SIPP meaning my annual wrapper expense is capped at £200 or 0.08%.

YouInvest have also been making it unattractive to hold mutual funds along with unit trusts and structured products.  The first £250,000 attracts a charge of 0.25%, the next £750,000 a charge of 0.1%, the next £1,000,000 a charge of 0.05% and above that level there is no charge.  In contrast shares, investment trusts, ETFs, gilts and bonds attract a flat charge of 0.25% capped at £100 per annum.  I previously held mutual funds with YouInvest but have now moved everything across to ETFs meaning my £260,000 worth of wealth held in my YouInvest SIPP attracts annual wrapper expenses of £100 or 0.04%.

So will I be moving any of my SIPP’s across to Vanguard?  At this point Vanguard is only offering a Vanguard ISA, Vanguard Junior ISA and a Vanguard General account.  They are not currently offering a SIPP so the answer is no before I even compare expenses or ask myself whether I want to consolidate my mutual funds or ETFs to be solely those from Vanguard.

Let’s move onto my ISA.  This is held with TD Direct Investing.  TD charge £30+VAT per year for the wrapper but if you have a portfolio of at least £5,100 or have a regular investing facility that reduces to zero.  That means my £185,000 of wealth held in shares and ETF’s attracts annual costs of 0%.  In contrast Vanguards new ISA would attract expenses of 0.15% on the first £250,000 and would be 0% after that.  So will I be moving my ISA to Vanguard?  The obvious answer is no as it would increase my annual wrapper expenses before I even think of consolidation or what I would do with my directly held shares.

Let’s move onto my Trading Account.  This is held with Hargreaves Lansdown.  Similarly to the SIPP the first £250,000 of mutual funds attract a charge of 0.45%, the next £750,000 a charge of 0.25%, the next £1,000,000 a charge of 0.1% and above that level there is no charge.  In contrast however shares, investment trusts, ETF’s, gilts and bonds attract no charges.  In this account I have the majority my High Yield Portfolio (HYP), which are individual shares, and an ETF meaning annual expenses of 0%.  So will I be moving my Trading Account to Vanguard?  Given their annual expenses of 0.15% on the first £250,000 the easy answer is no for a couple of reasons.  The first is expenses with the second being the ETF held is a gold ETF which Vanguard don’t offer an equivalent of and they also won’t let me hold direct shares.  Another consideration if it was attractive would be Capital Gains Tax.

So for me Vanguards new wrappers (for now at least) are a damp squib so it’s back to enjoying the bank holiday for me.  Is anyone moving to a Vanguard wrapper?  If yes, why?

38 comments:

  1. You have a relatively complicated setup, for a person holding just lifestrategy it might be more of a better option

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    1. Even if one was just Vanguard LifeStrategy I still struggle:
      - SIPP - no Vanguard wrapper
      - ISA - If you have less than £5,100 then I think Vanguard wins but as soon as you exceed that you'd be better off with TD Direct as you expenses would drop to 0%.
      - Trading - I don't personally use Halifax Share Dealing but I believe a LifeStrategy fund would incur 0% in expenses.

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  2. TD "0.25% Account Fee of the value of the SIPP per half year. Minimum £40 + VAT, maximum £100 + VAT per charge. (Total minimum £80 + VAT, maximum £200 + VAT per year)"

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    1. Can you expand on your thinking here Anon? In my situation that would make TD £140 more expensive per annum than YouInvest and £40 more expensive than HL.

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  3. To the provider, and before profit, fees are a function of assets under management. One of the reasons vanguard have been so wildly successful is that they've been transparent and challenging, perhaps even ethical (whatever that means), about passing on fee reductions as AUM grows.

    And let's not forget the marketing aspect. Every drop of 0.1% over the coming years will herald AUM attracting headlines.

    So I'd not be surprised to see a blog post in 18 months time entitled 'Why I am using Vanguard wrappers'.

    BTW each time you mention your multiple platform use I suffer a twang of concern, here I am holding all my investments and north of £600k on a single platform to save costs. Try as I might I've not been able to accept paying a few hundreds pounds as the insurance cost. The risk is seems so minuscule for someone years from retirement. Perhaps this is the time to revisit.

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    1. 0.01% even

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    2. "So I'd not be surprised to see a blog post in 18 months time entitled 'Why I am using Vanguard wrappers'." I agree with you 100% on this. If I was a UK wrapper provider I'd be a little worried about now. If/when Vanguard end up lower cost I'll have no problem writing that post and moving some of my wealth.

      Re diversification. I've written about it before, I agree the risk is small but I'm not prepared to even take a small risk here and am prepared to pay a little to minimise it. Seeing your wealth go to £0 during FIRE because of fraud would be devastating. It's actually a KPI I track in my wealth spreadsheet. Today:
      - my biggest wrapper exposure is HL at 24.8% of my wealth, then it's YouInvest at 21.5%.
      - my biggest product exposure is Vanguard at 29.5% then it's iShares at 19.2%.

      Why aren't you prepared to diversify? Is it just cost. A couple of hundred quid a year to diversify £600k seems like good insurance to me.

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    3. Thank you. This is food for thought. I've rapidly accreted savings at a pace similar to you, and what was ok 3 years ago may not be now, it's time I addressed the risk.

      Having said that, if one is ok with maintaining a concentration in vanguard funds (that's a big if, but I'd sooner take this risk than a risk to have all my funds with a single 3rd party wrapper provider like td/iii/youinvest), then the economics of using vanguard as a platform/wrapper changes.

      In other words, I could hand vanguard £375 to manage my wrappers instead of £x to Youinvest, £y to TD, £z to iii etc - once they offer SIPPs that is. Will keep a keen eye on it all - interesting times.

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    4. I agree with you that if you have a big savings rate in £ terms plus some healthy investment returns it can fast get away from you if you don't pay constant attention. In my case it was 2016 where wealth grew by £260k.

      Given your high savings pace have you set yourself a FIRE target (both £'s and time)?

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    5. About 8 years ago I set myself a goal of £1m plus the house I had just bought by 50. Then marriage to a wife with no savings and then two kids came. So here I am at 46 and on track to hit that goal at around 50. Being a family of 4 rather than 1 should have me planning a much higher amount, but I figure I'll retire at 53/54 with whatever I (we!) have then. It's been interesting to watch your path, as we have similar net worth and age and savings rate. Yet other circumstances (parent age, house buying age, location) drive so much, completely valid, variance in decisions about retirement plans.

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  4. Hi RIT,

    Like you my ISA is with TD and costs me pretty much nothing to maintain (a small charge on a small fund holding that isn't worth the cost of selling).
    Would I move to Vanguard? Right now no - I dont use their funds, only their ETFs and you can find better costs elsewhere.
    Cheers,
    FiL

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    1. Sounds like we have common thoughts her FiL.

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  5. RIT

    Can I just clarify on your TD ISA - although they waive the account fee over £5,100, there would still be platform fees of 0.3% per year so £555 p.a.but if you were to hold Vanguard funds/ETFs on their own platform the fees would be £277.50 p.a.

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    1. Hi John

      I hold shares and ETFs in my TD ISA. I can confirm I have no platform fee. Total annual expenses = £0. This is in line with their website which states "£30 + VAT per year or part year, or FREE if you: have a portfolio of £5,100, or have an active regular investing facility"

      I think you might be thinking about the TD SIPP. Here it's "0.25% of the value of the SIPP per charging period with a minimum of £40 + VAT and a maximum of £100 + VAT per charge (total minimum £80 + VAT and maximum £200 + VAT per year)."

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    2. Thaanks for clearing that one up RIT. Maybe the 0.3% charges apply to those holding funds.

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    3. See note further down John. It is indeed charged on OEICs and Unit Trusts.

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  6. It depends a little on how much one has invested in ETF's, in which ones and where they are held. For example, VWRL has an annual fee of 0.25% but can be held for £200 in the HL SIPP. If Vanguard had a SIPP one could create a similar 'world' fund from 3 Vanguard mutual products and benefit from lower annual management fees. This would be worth more than the 0.15% platform fee capped at £375. The same would apply for ISA's and one would be well ahead on the unwrapped account. Only use HL so the only comparison I have made.

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    1. "It depends a little on how much one has invested in ETF's, in which ones and where they are held." VWRL in a HL SIPP will be 0.45% until you max at £200. Similarly, in a YouInvest SIPP it will be 0.25% until you max at £100 in YouInvest. So if (when?) Vanguard offered a SIPP at 0.15% they would be lowest cost until a cross over point of £66,667 was reached after which YouInvest would be the lowest cost.

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    2. That's not quite what I meant.

      If I have £250k invested in VWRL at HL it costs me 0.25% p.a in management fees - £625 + HL SIPP fee of £200 = £825. If I move that to Vanguard I can invest it in Developed World ex UK, UK All Share and Emerging Markets mutual funds in proportions of 80/10/10 and it would cost me a weighted average of 0.155% p.a or £388 p.a + 0.15% Vanguard platform fee £375 capped so £763. Saves dividend reinvest costs as well as one can ACC units if one wants. Your maths is better than mine - where have I gone wrong?

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    3. Point I didn't mention being, but obvious one,is that while it is prohibitively expensive to hold funds on some platforms - HL, AJB to mention just two, Vanguards offering makes that more reasonable for those with portfolios above a certain size.

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    4. Given Vanguard don't yet offer a SIPP this is all a bit theoretical but let's play it out. What I think you're rightly flagging is that the key is that it's product expenses + wrapper expenses. So:
      1. 100% x 0.25% VWRL + £200/£250k HL = 0.33%
      2. 80% x 0.15% Dev Wrld + 10% x 0.08% FTSE All Share + 10% x 0.27% EM + 0.15% "Vanguard SIPP wrapper" = 0.305%

      So we're now slightly better off with Vanguard, as you highlight, but let's go one step further:
      3. 90% x 0.18% VEVE + 10% x 0.25% VFEM + £200/£250k HL = 0.267%. So we're back to winning with HL.

      You could of course then better this by buying more granular ETFs, which is likely to be cost effective given the size of the portfolio. How about VUKE, VMID, VUSA, VERX, VJPN and VFEM in an appropriate ratio to simulate VWRL?

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    5. Overall costs are what matters but one one could do as you suggest also. I actually hold VWRL because it does the re balancing for me and I thought the extra it costs was worth it as it means I don't have to test my nerve by re balancing manually when markets are falling.

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  7. Thanks for this comparison, RIT. I just transferred my L&G ISA (charges = lots) to Vanguard, because I thought Vanguard's all in fee for their tracker funds (wrapper plus fund amc) looked competitive. But it sounds like using ETFs you can reduce still further - with TD Direct account above £5100 you are just paying the dealing costs of £5.95 per transaction (3bps if you max out your ISA allowance and only invest in one holding each year) ?

    Have you seen any research showing whether EFTs ever trade much at a discount (or premium!) to NAV. That is something you always had to watch out for with investment trusts.

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    1. Some time ago I noticed that the low cost wrapper providers were starting to not like tracker funds. I don't know whether their costs are higher to wrap them or whether they were just profiteering but I wasn't going to sit idly by while £100's leaked away in expenses. My total wealth expenses are now 0.23% and depending on location we choose I can see potential to reduce that further.

      Be careful with TD Direct dealing costs. It's £5.95 only for the first 3 months. "After the 3 months, we’ll move you onto our Active (£5.95), Frequent (£8.95) or Standard (£12.50) rate depending on how often you trade." As a person who buys/sells infrequently I pay £12.50.

      I can confirm that the only expenses I see on my TD Direct ISA are trading costs of £12.50.

      There is definitely an ETF buy/sell spread but for the more common Vanguard/iShares ETFs that I buy it never seems worse than say a commonly traded share.

      I'm actually not sure about price vs NAV. I always thought that the buy/sell spread was around NAV but I could be wrong on that one. Do any readers know for sure?

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    2. Helpful article here. In short, if an ETF price gets too far out of line from NAV, institutional investors can create units or cash in to bring the price back in line.
      https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcenter/article/ETF_PremDisc

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  8. Hi RIT

    I think TD charges a fee in both ISA and SIPP accounts for holding unit trusts or OEICs of 0.30% per year on Funds to a value of £250,000, and 0.20% over that.

    But as you say, stocks, bonds and ETFs are free in their ISA account if your balance is over £5,100.00

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    1. I don't hold unit trusts/OEIC's, only ETFs/Shares, in my ISA so can't be 100% sure but that's not what their website says.

      On the SIPP side they are charging 0.25% of total wealth. This is where I'm looking https://www.tddirectinvesting.co.uk/rates-and-charges

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  9. @GhostRider, @John and @Borderer
    Just found this https://www.tddirectinvesting.co.uk/rates-and-charges/investment-funds . You are all correct and I was wrong. TD Direct are indeed charging 0.3% for the first £250k and 0.2% over £250k to a maximum of £1,500 per Trading/ISA/SIPP account. So for something like LifeStrategy it would indeed be beneficial to be with Vanguard rather than TD. For me, I'm still better off with TD as I no longer have OEIC's having transferred to ETF's.

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    1. Just goes to show what a minefield this is. If fairly switched on people need to double and triple check to understand charges, imagine what the man in the street is to make of all this?

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  10. @Prospector, ahem point of information: RIT is much more than 'fairly switched on'!

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  11. @RIT: why do you hold your HYP shares exposed to income tax? Would they be better off in a wrapper, with low-yielding shares unwrapped?

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  12. My personal SIPP and ISA arrangements are pretty similar to RITD's - although I am at the moment holding a lot more cash than you are and than I normally do (I'm older with more funds, have a secure index linked pension and feel that we are unlikely to see much more of this bull market). I will stick with my two existing brokers (one of which is HL) as my analysis of their charges for ETFs/Investment trusts is much as yours.

    I am also responsible though for my partner's pension and investments - she has absolutely no interest in finance at all and is just pleased to have seen her assets double in the last five or six years. She comes from a family of 'long survivors' and could well live for another forty years. I think I will be shifting most of her assets to Vanguard - initially her ISA and then (when it becomes available) a SIPP. I suspect that many people who advise the 'financially uninterested for the long term' will take a similar approach as it leaves re-balancing and broad investment decisions to Vanguard and ensures low long term charges. I will probably use their Lifestratagy 60 product. I am in part influenced by the nagging doubt that at some point HL will be tempted to change their very generous charging structure for those who avoid unit trusts.

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  13. @FrankM, I agree that HL could rejig their charging structure in the future to the deteriment of ETF and share holders.

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  14. Hi, great blog enjoy reading. III have taken over TD and in there most recent blurb say they will change the charging structure so things might change.

    """
    There are no immediate changes being made to rates and charges.

    Later this year we will introduce a new pricing approach as part of our commitment to providing great value for money, through simple, fair and competitive charges.

    We believe that customers should be charged clear and fair prices based on how they invest. We will introduce a fixed fee per customer for our standard trading and investing services which will be held as a credit towards trade commissions for buying and selling. When that credit has been used we will charge a simple, low commission for each trade you place.

    There will be a simple set of other charges for those customers who choose to use our more specialist and added-value services, such as advanced trading tools and SIPP accounts.
    """

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  15. @RIT, likewise, I don't understand why anyone with over £5,100 capital would consider anything but TD Invest for their stocks & shares ISA.

    I've got around £40k (entirely in Vanguard Lifestrategy) with Charles Stanley at a 0.25% fee. I've finally woken up and intend to move this to TD Invest right away. My question is: why doesn't everyone else? I'm baffled at the excitement over Vanguard's platform announcement when it comes with a 0.15% fee.

    I wonder if I'm missing something obvious given my inexperience...

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    1. @Anon
      Please be careful with TD per the comments above. If you buy LifeStrategy with them it looks like they'll charge you 0.3% for the first £250k and 0.2% over £250k to a maximum of £1,500 per Trading/ISA/SIPP account. Based on this if you wanted to stay with LifeStrategy Vanguard would actually be the way to go with their 0.15% (I think) which also beats your 0.25%.

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    2. TD are a rip compared to Vanguard. It's not confusing, just look at the charges page.

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  16. There's a simple solution for that.

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