Hargreaves Lansdown’s tracker bombshell

"Hargreaves Lansdown (HL) drops a tracker bombshell," says the Motley Fool. As Britain's biggest direct seller of investment funds to private investors, any big change the firm makes will always hit the headlines. So what has it done?

The change to its fund supermarket platform Vantage comes into effect from 31 December. Up until now, if you held certain tracker funds (which simply track an underlying index), through the platform, you had to pay the annual fee levied by the product provider and beyond that, a 0.5% Vantage charge capped at £45 per year (for the individual savings account option). The problem from the firm's point of view is that unlike most unit trusts, trackers typically don't pay a trail commission. These small regular payments are an important source of extra income to a broker well after a product has been sold.

So from the New Year, anyone holding a tracker from certain providers (including HSBC, Legal & General and M&G) will be hit with a fixed charge of either £1 or £2 per account per month (see here for a list of the funds affected). This fee is also being extended to certain trackers that, up until now, have been free of any charge on the Vantage platform. Danny Cox, head of advice at the broker, is at pains to point out that 97% of the funds bought by customers will not attract the extra charge.

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However, of those who do hold the affected funds, small investors will be hit hardest. As Dan Hyde notes on Thisismoney.co.uk, "where a 0.5% fee is replaced by a £1 flat fee, those with less than £2,400 will end up paying more". The breakeven holding on a £2 fee fund is more like £4,800. Beyond that an investor makes a cost saving from the move, assuming that they were already paying the 0.5% annual fee.

So what should a small investor do? It's some consolation that you can switch funds within Vantage for free, and that some very low-cost Vanguard trackers will apparently soon be made available on the platform. Moving broker is an option, but you may be hit with an exit fee (typically £25 + VAT). Besides, other providers may well follow the firm's lead soon. We'd wait and see how other providers react before making a move.