I realised on Wednesday morning that there is a chance I have been in this business too long. I woke with a sense of excitement rather as children sometimes do at Christmas. I was really looking forward to finding out how Hargreaves Lansdown (HL), Britain's best-known online investing platform, was going to change its pricing structure to comply with the new set of Retail Distribution Review rules.
Would there be a flat fee? Would it be simple? Would it be transparent? Would my mother understand it? Would it cost me less? Would the change be as disruptive to the market and as exciting as Hargreaves Lansdown itself was when it first launched all those years ago?
Oh dear. The key lesson for me is that if you ever allow yourself to get excited about possible innovation in the financial industry, you will be sorely disappointed. Days later, I'm still a tad irritable about the whole thing.
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The system isn't as bad or even as rapacious as it could be. HL is very solvent and service-orientated and most people don't much mind what they pay them. But the new structure just isn't particularly interesting, innovative, inexpensive or simple.
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The booklet I got in the post this week from HL has a promising title: "Changes to the Vantage Service explained". The rest is less promising. It contains 17 pages explaining the changes to the charges. They addled my brain.
The upshot is that if you are a traditional fund investor you will pay HL a bit less overall, but if you are a passive investor or if you have a thing for individual stocks and investment trusts (as I do), you will pay a bit more.
I'm none too keen on the treatment of investment trusts (although there is a good new regular investment service) and the tiered charging based on the value of your investments. I had really hoped that it might take transparent flat-fee pricing mainstream. Instead, like the rest of the ad valorem obsessed industry, HL has claimed that this structure is fair.
It isn't remotely fair; it doesn't cost that much more to administer large accounts than small, so making those with large accounts pay more effectively forces them to subsidise the less well off. We don't need stockbrokers to redistribute wealth in this manner: that's what we have governments for.
Still, there is a medium-sized victory to wrench from the jaws of all this conventionality. What HL has done is to force fund management companies to cut fees on their offerings to make the whole thing work. And in the great debate over whether one should invest in passive funds that track market indices or actively managed funds, this matters.
There have been a number of studies (mostly from tracker managers) attempting to prove that passive is better than active. Active managers have tried to prove the opposite.
A new study from FE Trustnet claims the average UK growth fund has beaten the average FTSE 100 and FTSE All Share tracker over the past one, three, five and ten years. The IMA All Companies sector (made of active funds) is up 123%, and the average tracker up 105%.
That will surprise a few people. But there are actual shocks in the numbers too. Tracker funds are supposed to track indices and generally we assume they do. But the overall performance numbers are dragged down by some horrors: the Halifax UK FTSE 100 Index Tracking Fund has risen a mere 71% in the past decade partly because it is badly run, but also because it comes with an inexcusable 1% charge. I balk at paying that for an active fund.
And as Simon Evan-Cook of Premier a huge fan of active management points out, active managers have a bias to smaller and medium-sized companies and the "rear view mirror" shows spectacular returns for those over the most periods with pretty low volatility along the way.
You could say that this clearly makes active management, and in particular, active management in small-caps "the holy grail of low risk and high returns". Or you could see the plummeting volatility as a calm before a collapse tempting, but best avoided.
If it reverses, trackers could suddenly look rather better in comparison. Or the active managers might see it coming, get out in time and hang on to their happy record.
However, the key point has to be that the less you pay for an active fund relative to a passive fund, the lower the risk you run in holding them. Pay 0.5% for a tracker and 1.5% for an active fund, and the active has to return one percentage point more every year just to match the passive.
This brings us back to Hargreaves Lansdown and how it is pushing down the fee element from fund managers. "Fund manager costs need to be squeezed, and we are doing the squeezing," it says.
It's a nice quote and I love the idea that they are gunning for the private investor. But if I were a fund manager looking at HL's 60% margins, "pot", "kettle" and "black" are the words that might pop into my head. I suspect that once the market digests this shot in the pricing war there will be more squeezing to come and it might not just be the managers.
This article was first published in the Financial Times.
