Time to Consider your Cash Holdings?

It was obvious from a recent FCA review of “platforms” (i.e. stockbrokers), that many retail investors held large amounts of cash in their portfolios. When folks are feeling the stock market has had a rather long bull run, perhaps they feel it is wise to keep a high level of cash. Or perhaps it’s because they simply can’t be bothered to move it when their high-street bank is offering such trivial rates as 0.2% per annum on deposit accounts. Needless to point out perhaps that unlike in the good old days, most stockbrokers do not pay interest on cash holdings.

But interest rates are rising and new entrants to the savings market are starting to pay decent rates – still not as good as inflation but a lot better than zero. For example, Goldman Sachs have just launched an account named Marcus (after one of their founders). It will be paying 1.5% AER although that includes a bonus rate of 0.15% for the first year only. That probably makes it the top paying “easy access” savings account at present.

It’s an on-line only account and you can only put in up to £250,000. Otherwise it looks to be fairly straightforward apart from the usual complexities of opening a bank account and proving who you, that you are not money-laundering or a suspicious person.

This is definitely a useful initiative and if they get enough customers it might prod the high street banks and stockbrokers to think again.

See https://www.marcus.co.uk/uk/en for more information.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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AIC Calls for KIDs to be Suspended

The Association of Investment Companies (AIC) have called for KIDs to be suspended. KIDs are those documents devised by the EU that were aimed at giving basic information on investment funds – and that includes investment trusts which the AIC represents.

It was a typical piece of badly implemented EU regulation even if the motive was worthy. But KIDs give a very misleading view of likely returns from investment funds. Whoever designed the performance rating system clearly had little experience of financial markets, and neither did they try it out to see what the results would be in practice. Similarly, if they had bothered to consult the AIC or other bodies representing collective funds, or experienced investors as represented by ShareSoc, they would have realised how misleading the results might be.

It also imposes costs on investment managers and on brokers who have to ensure their clients have read the KID before investing – even if they are already holding the fund/shares or have invested in it previously. This means for on-line brokers we now get a tick box that we have to click on which is simply tedious. I just click on them automatically because if I intend to buy an investment trust there is a great deal of information available elsewhere in the UK and the KID does not add anything of use in my opinion.

I think KIDs should be scrapped rather than just suspended. They serve little useful purpose and just add a costly bureaucratic overhead. This is the kind of nonsense that Brexit supporters are keen to get rid off when we do finally get out of the EU monster. But will we if Mrs May gets her way?

The AIC press release is here if you want more information: https://www.theaic.co.uk/aic/news/press-releases/aic-calls-for-kids-to-be-suspended

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Charles Stanley Direct Increase Platform Charges

Stockbroker Charles Stanley Direct are increasing their platform charges. Their platform fee will rise from 0.25% per annum to 0.35% per annum. That might sound a large increase but in practice many clients will not pay any more. The overall annual cap of £240 per annum remains on those holding shares rather than funds and even that disappears if you trade once per month. On funds the charge of 0.35% reduces on larger portfolios to as low as zero on those over £2 million. Transaction charges remain at £11.50 per trade on shares and zero on funds.

That’s a brief summary of the new charges, but as with any platform you need to work out exactly what you will pay based on the composition of your investments, the size of your portfolio and the frequency you trade.

It would appear that these changes will mainly impact the smaller investor and Charles Stanley put the reason for the change down to the need to maintain investment in the platform when they face complex and evolving changes. Mention is made of the need for more cyber security but all brokers have been hit by increasing regulation and the requirement to change their systems as a result.

As we saw from the results from The Share Centre last week, who reported a statutory loss of £280k for the half year, it’s not easy to make money in the “platform” business at present. Charles Stanley Direct lost money in the last full year also, although the rest of Charles Stanley made a profit. Only Hargreaves Lansdown, the gorilla in the market place, seem to be making real profits on their capital invested although it will be interesting to see the financial figures from A.J.Bell Youinvest if they go public soon as forecast.

Part of the problem is the exceptionally low interest rates brokers obtain on their holdings of client cash from which historically stockbrokers made a large proportion of their profits. Bank of England base rate increases will assist but they have been waiting a long time for that to improve and rates are not rising rapidly.

As I said before in my comments on the recent FRC Report on the Platforms Market, “informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!”.

Incidentally my submission to the FRC on their Report is now present on my web site here: https://www.roliscon.com/Investment-Platforms-Market-Study.pdf

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Shareholder Voting and Financial Times Generosity

Anyone using an on-line investment platform will be aware that your shares are normally held in a nominee account (i.e. you do not own them, your broker does – you are only the “beneficial owner”). ShareSoc has long campaigned for reform of this system because it usually results in you not being able to vote your shares at General Meetings, and you are unlikely to be sent information such as Annual Reports. You are effectively disenfranchised and the lack of voting by private shareholders undermines good corporate governance. Platforms can enable you to vote by submitting proxy votes on your behalf, but many do not offer this facility.

Last week the Association of Investment Companies (AIC) published some information that helps you to get a vote. They showed which platforms provide such voting facilities. See https://www.theaic.co.uk/aic/news/press-releases/aic-releases-information-to-help-shareholders-vote-on-platforms for the details. Note though that some may permit it but often without providing an easy to use system of voting.

Ian Sayers of the AIC had this to say: “We need all platforms to offer a simple, online solution that means that shareholders get the information they need on resolutions affecting the company and can exercise their democratic rights at a click of a button. In the meantime, investors should consider whether and how they can vote their shares as part of their decision over which platform to use.”

One can only agree with his sentiment on this. The solution is to reform the laws and regulations in this area, and ideally have all shareholders on the share register of companies. But in the meantime, it’s worth reviewing the AIC list when choosing a platform to use.

Another item of news last week was a report from Reuters that a group of Financial Times journalists have complained about the pay of their CEO John Ridding. He earned £2.55 million pounds in 2017. The group led by an NUJ representative have written to their colleagues around the world saying the pay was absurdly high and that he should give some of it back to lowly paid staff.

Comment: Pay is escalating all over in the business world and this is just another example of outrageous pay inflation among senior management. The journalists’ initiative is to be applauded. As a daily reader of the Financial Times, I also have concerns that the CEO is not doing a great job either than might justify these gazillions. In the last couple of years, since the acquisition of the FT by Nikkei, the content of the paper has substantially changed.

It still publishes very good in-depth analyses of financial issues – for example, the review of accounting and audit standards headlined “Setting Flawed Standards” on Thursday which is well worth reading. But it has taken a very pro-EU and pro-Remainer political stance with numerous articles and published letters with a highly political slant. At the weekends we have to suffer from ex-sports journalist Simon Kuper’s views on that subject. He may know a lot about football but his views on UK politics and those who support Brexit seem very ill-informed.

Coverage of hard news on companies is also now very patchy, with more on the politics of foreign nations and on social issues. The FT needs to get back to reporting on financial matters and cut back on the political polemics.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Investment Platforms Market Study

The Financial Conduct Authority (FCA) have just published an interim report on their study of “investment platforms”. It makes for very interesting reading. That is particularly so after the revelations from Hardman last week. They reported that the revenue per assets held on the platform from Hargreaves Lansdown (HL) was more than twice that of soon to be listed AJ Bell Youinvest. HL is the gorilla in the direct to consumer platform market with about 40% market share. HL earns £473 per £100,000 invested while Youinvest earns only £209.

That surely suggests that competition is weak in this market. Indeed the FRC report highlights that investors not only have difficulty comparing the charges of different platforms, but they do not seem too concerned about high charges as they focus more on other aspects of the service provided. It also says on page 23 of the report: “Our qualitative research also found that consumer satisfaction levels are sometimes linked to satisfaction with overall investment returns, which tend to be attributed to the performance of the platform. This suggests some confusion about consumers’ understanding about platforms’ administrative function as opposed to the performance of investment products. So it is possible that consumers’ relatively high satisfaction levels with platforms could be influenced by the positive performance of financial markets in recent years”. In other words, the consumers of such services are very complacent about the costs they pay at present.

Another piece of evidence that this is not a competitive market obtained by the FRC was that they found that when platforms increased or decreased prices it had no significant impact on flows in and out of the platform. No doubt some platform operators will read that with joy, but others despair! 

Indeed when I made some comments on Citywire effectively saying I thought it suspicious that there were so many positive comments about Hargreaves Lansdown in response to an article reviewing the Hardman news, particularly as they were clearly much more expensive than other platforms who provided similar effective services (I use multiple ones) I was bombarded with comments from lovers of the HL service. Bearing in mind that platform charges can have a major impact on overall returns in the long term from stock market investments, you would think investors would pay more attention to what they are being charged.

One particular problem is that switching platforms is not only difficult and a lengthy process but can also incur charges. This is clearly anti-competitive behaviour which has been present for some years and despite complaints has not significantly improved.

The FRC summarises its findings as:

  • Switching between platforms can be difficult. Consumers who would benefit from switching can find it difficult to do so.
  • Shopping around can be difficult. Consumers who are price sensitive can find it difficult to shop around and choose a lower-cost platform.
  • The risks and expected returns of model portfolios with similar risk labels are unclear.
  • Consumers may be missing out by holding too much cash.
  • So-called “orphan clients” who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service.

That’s a good analysis of the issues. The FCA has proposed some remedies but no specific action on improving cost comparability and the proposals on improving transfer times are also quite weak although they are threatening to ban exit charges. That would certainly be a good step in the right direction. Note that a lot of the problems in transfers stem from in-specie transfers of holdings in funds and shares held in nominee accounts. Because there is no simple registration system for share and fund holdings, this complicates the transfer process enormously.

One interesting comment from the AIC on the FCA report was that it did not examine the relative performance of different investment managers, i.e. suggesting that lower cost investment trusts that they represent might be subject to prejudice by platforms. They suggest the FCA should look at that issue when looking at the competitiveness of this market.

In summary, I suggest the platform operators will be pleased with the FCA report as they have got off relatively lightly. Despite the fact that the report makes it obvious that it is a deeply uncompetitive market as regards price or even other aspects, no very firm action is proposed. But informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!

The FCA Report is present here: https://www.fca.org.uk/publication/market-studies/ms17-1-2.pdf

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Beaufort Administration, Intercede and the Mello Conference

Yesterday I attended the first day of the 2-day Mello investor conference in Derby. There were lots of good presentations and some interesting companies to talk to. One hot topic of conversation was the collapse of Beaufort which was forced into administration (see two previous blog posts on the topic for details). There are apparently many people affected by it. There are a number of major issues that have arisen here:

  • The administrators (PWC) have suggested it might cost as much as £100 million to wind up the company and return assets to clients which seems an enormously large figure when the assets held are worth about £550 million. The costs will be taken out of the clients’ funds and as a result there will hundreds of larger clients who will suffer substantial loses (those with assets of less than £50,000 may be able to claim against the Financial Services Compensation Scheme – FSCS – but larger investors will take a hair-cut).
  • The assets (mainly shares) were apparently held in nominee accounts. Surely these were “segregated” accounts, i.e. not available to be treated as assets of the failed business? Most brokers who use nominee accounts will have wording in their contracts with their clients that cover this with often fine words that conceal the underlying reality that if there is any “shortfall” then the clients may be liable. But regardless, PWC are saying that because this is a “Special Administration” they have the right to take their fees out of the client assets/funds.
  • There will be a Creditors’ Meeting as required by all administrations but will the creditors be able to challenge the arrangements put in place by PWC and the costs being incurred? From past experience of such events I think they may find it very difficult. Administrators are a law unto themselves. It is alleged that there were offers from other brokers to take over the assets of Beaufort and their clients very quickly and at much lower cost, but that offer has been ignored. Investors need to ask why.
  • Note that the Special Administration regime was introduced during the financial crisis to enable the quick resolution of problems in financial institutions such as banks. This is where it is necessary to take prompt action to enable a company to continue trading and the clients not to be prejudiced. But in this case it seems we are back to the previous state where client assets are frozen for a lengthy period of time while the administrator runs up large bills at the clients expense.
  • I said only recently that the insolvency regime needs reform after the almost instant collapse of both Conviviality and Carillion. There may not have been a major shortfall in Beaufort and it might have been able to continue trading. But the current Administration rules just provide large, and typically unchallengeable, fees for the administrators who give the impression of having little interest in minimising costs. The result is the prejudice of investors in the case of a broker’s collapse, or of shareholders in the collapse of public companies.
  • Can I remind readers that part of the problem is the widespread use of nominee accounts by stockbrokers. I, ShareSoc and UKSA have long campaigned for reforms to reduce their use and give shareholders clear title and ownership after they purchase shares. In the meantime there are two things you can do: a) Avoid using nominee accounts if at all possible (i.e. use certificated trading or personal crest accounts so your name is on the share register); b) if you have to use a nominee account, make sure you are clear on the financial stability of the broker and that you trust the management. It would not have taken a genius to realise that some of the trading practices of Beaufort might raise some doubts about their stability and reputation.

I do suggest that investors who are affected by the collapse of Beaufort get together and develop a united front to resolve not just the problems raised by this particular case, but the wider legal issues. Forceful political representation is surely required.

See this web site for more information from PWC: https://www.pwc.co.uk/services/business-recovery/administrations/beaufort/beaufort-faqs.html

An amusing encounter at the Mello event was with Richard Parris, the former “Executive Chairman” of AIM listed Intercede (IGP). He was talking in a session entitled “The importance of the right board of directors” and he conceded that “separation of roles” is important, i.e. presumably he would do it differently given the chance. Richard, the founder of the company, has recently stepped down to a non-executive role, they have a new Chairman, and even Richard’s wife who was operations manager has departed. While I was in the session, there was even an RNS announcement saying the “Chief Sales Officer” had resigned (I am still monitoring the company despite having sold all but a nominal holding years back).

Richard pointed out to me that the pressure put on the company over his LTIP package back in 2012 meant that his share options are worthless as the performance targets put in place were not achieved. Well at least he is still talking to me and has joined ShareSoc as a Member apparently. Sometimes time can heal past disputes, and as I said, shareholder activism does work!

But it is regrettable that RBS are recommending voting against a resolution proposing a shareholder committee at their upcoming AGM. Perhaps not surprising, but a shareholder committee could avoid confrontation over such issues as remuneration and would be a better solution that confrontation.

I hope the Mello event becomes a regular feature of the investment calendar.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Which Is The Cheapest Platform?

Many investors do not research which trading platforms (a.k.a. on-line stockbrokers) are the cheapest before they sign up with them. Neither do all platforms offer the same facilities – for example all the different types of ISAs and allow investment in both funds and investment companies or direct shares. Retail investors tend to depend on which name they remember from advertising, from friends’ recommendations and other sources. But now the Association of Investment Companies (AIC) has provided a useful comparison tool.

The AIC represents investment companies and has issued the following press release about the launch of their new platform comparison tool: https://www.theaic.co.uk/aic/news/press-releases/aic-launches-platform-comparison-tool-on-its-website

This is an exceedingly useful tool and shows that the platform charge on several platforms can be as high as over £3,000 p.a. or as low as less than £100 p.a. for a portfolio valued at £1 million invested solely in open-ended funds. In other words, an enormous range!

They also have separate tables for investments in investment trusts so you can compare those charges against open-ended fund portfolios, or a mix. Funds are often more expensive. You might notice they don’t give the cost of directly investing in shares, but these would be the same as investment trusts as they are simply listed company shares.

They don’t include transaction costs on trading which is worth bearing in mind though. The volume of trading as well as the size of portfolio affects the overall costs.

Surely you don’t need reminding that minimising what you pay to platforms is one of the key ways to maximise long-term investment performance as they can seriously erode your returns. If you are looking for a new stockbroker, it would be worth reviewing this comparison tool first because although service quality is important there is little correlation between cost and service. Some of the lowest cost brokers provide very good service in my experience so one wonders why there is such a price difference in this market. One reason might be the difficulty investors have in switching brokers that reduces competition in this market.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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