There was a good article published yesterday by Phil Oakley of Sharescope on Hargreaves Lansdown (HL). Why are they so profitable a business when, as Terry Smith said, they seem to be in essence a “distributor” operating in a highly competitive field with few barriers to entry? The answer, apart from their high-quality customer service, is the level of charges they make on investment in funds (unit trusts and OEICS, not investment trusts which are treated as shares).
Investors in SIPPs via HL might be paying several thousands of pounds per year on larger portfolios (e.g. £3,000 on £1m and more on larger amounts), when investors would only pay £200 for a similar portfolio in shares. Other platforms also charge more for funds, but are substantially cheaper even so.
Why do they charge so much more for funds than shares? Phil questioned whether there is any more administration as a result.
But you can see why HL and other platforms promote funds so aggressively rather than direct investment in shares or in investment trusts (and bear in mind that there are usually equivalent investment trusts for most OEICs, often even managed by the same managers).
HL seems to be a company that it is better to be an investor in than a customer. Customers are suffering from the syndrome of buying something that they are sold that is in the seller’s interests, rather than standing back and deciding what they want, who they wish to buy it from and what price they wish to pay. In other words, investors are not “shopping around” for the best deal.
For that reason when HL adopted their new platform charges, I closed my account and moved my SIPP portfolio elsewhere. But it’s not a thing to be done lightly as it takes a lot of time and hassle to do so as disgruntled customers of Barclays are finding out. An example of the FCA not ensuring there is a competitive market by guaranteeing rapid transfers as they should be doing.
Now many readers might say, but I don’t have a large portfolio – just a few tens of thousands in value. And I get the same high-quality service for relatively little money. Firstly you need to bear in mind that overall portfolio charges are a significant drag on investment returns. As your portfolio grows, the bigger the drag.
HL may be vulnerable to losing their larger customers, who are clearly the most profitable ones, to competitors who could cream off the big hitters by various marketing tactics. Having a number of different stockbroking accounts, in general I find the administration is fine and they seem to compete on price to a large extent rather than facilities or service. Their focus is on attracting new investors who wish to start investing rather than converting existing investors from other platforms. Perhaps it’s the difficulty of persuading clients to move their accounts that inhibits them and reduces the competitiveness of the market for stockbroking services.
HL might therefore be vulnerable to regulatory change if the FCA tacked this issue vigorously and other platforms got their marketing act together.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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