Hargreaves chief executive Ian Gorham speaks to Nick Paler about why the platform is standing firm on exit fees, its legal battle with HMRC, and the grey area between execution-only offerings and advice.
This year looks set to be a big year for platforms, as the end of commission payments and a switch to clean pricing dominates group’s agendas.
Nowhere has this major upheaval been felt more keenly than at Hargreaves Lansdown, the country’s largest D2C platform.
With old, private deals between platforms and fund groups now dragged into the spotlight for all to see, Hargreaves’ pricing announcement in January was pivotal for the future of not only its own business, but also asset managers, who need distributors on side to ensure flows to their own funds.
For Hargreaves’ chief executive Ian Gorham – who has been at the helm for almost four years – the group’s move to an annual fee of 0.45% for the vast majority of its users is “pretty reasonable” and chimes with pricing in the US, where the platform market is even more developed.
Of course, the problem with going first is that it leaves you open to being undercut and, following Hargreaves’ own announcement, a range of lower-priced propositions have come forward from rivals including Fidelity Personal Investing and Barclays Stockbrokers.
Both pitched their proposition for clients in the £250,000 bracket at 0.35% annually, and Gorham said his own platform’s charges will be reviewed once the tax year ends.
However, while they will likely respond to challengers, Gorham is aware of the dangers of a 'race to the bottom', especially for a business which cannot hide under its corporate structure and recycle losses elsewhere, unlike some of its competitors.
“Charges will come down more, but I don’t think they will come down in a rush,” he said.
“Where we have landed is pretty reasonable, but there may be some movement over the next 12 months.”
Hargreaves does at least have the advantage of being profitable. Its last set of full-year results revealed pre-tax profits of £195m and an operating margin of 66%.
Therefore, it has some scale to adjust prices if necessary, unlike its competitors.
Gorham said a lot of rivals in the space have balance sheets “thinner than a wet piece of paper”, and he said investors using platforms need to consider this when they are picking their provider.
“It is a scary state of affairs. We are listed, so you can see our finances, but most platforms are not. Investors need to think more about the robustness of the people that look after their money.”
While Hargreaves’ headline charges may see some movement, one area on which Gorham is refusing to countenance change is exit fees.
One of the most unpopular fees in the market, exit fees are now the subject of a campaign by the Daily Telegraph, which is pushing for them to be scrapped,
Gorham is adamant the costs of a client exiting a platform needs to be paid for until the regulator itself puts forward a standardised method for switching.
Hargreaves charges £25 per fund or line of stock to transfer to another platform and, given its average user holds five funds, that is £125 just to switch.
Its price is similar to Barclays (£30) but higher than Charles Stanley Direct (£10), while Fidelity charges nothing at all.
Gorham said Hargreaves’ charge is not “particularly high”, adding it will not come down until more transfers are done automatically.
“Only 35% of transfers are done electronically, so doing it in stock is a huge piece of work,” he said.
“It is not an easy thing, but we are campaigning to the regulator to say ‘you need to make this easier to do’. We think the requirement to transfer in stock should apply across the whole of the financial services industry, but the regulator is not currently willing to bring in these regulations.”
Gorham said Hargreaves transfers more clients into its business than it transfers out, so it would welcome a change to the process. “It is entirely in our interest to make it easier to do, but until the regulator does bring in that requirement, I am afraid people will have to put up with fees.”
He acknowledged a “small minority” charge nothing for exiting and said that is “up to them”, but added there is a cost to transfer a client that must be met.
“If I made it free to transfer out, then what pressure is there on the regulator to act?” he said. “We agree there is a problem, and we would love the cost of it to come down, but the regulator’s position at the moment is to leave it to TISA to solve. However, there are so many vested interests that it is unlikely anything will get changed.”
Already an area that delivers around 15% of the group’s revenues, Gorham said Hargreaves Lansdown’s advice arm continues to grow year on year, although he does not expect it to increase its share of revenues overall.
The group continues to skirt around the advice threshold, offering guidance to investors around portfolio construction, and Gorham is keen to expand this area, but once again he said regulations in place at the moment make it a grey area.
“We want guidance about advice/non-advice. The regulator is reviewing this at the moment, and we clearly have an appetite for giving more personalised help to investors.”
Hargreaves, like other D2C platforms which are unadvised, needs to be careful any communication it sends out to clients is not construed as advice.
But Gorham said the current rules governing this area are not totally fit for purpose.
He points to cases where there is a middle ground between advice and self-service – where a client wants to invest in funds or shares themselves and may just need some information about how to construct a balanced portfolio.
“The current regulatory situation is unsatisfactory. We do not need to do a full fact find on a client who is that kind of investor,” said Gorham.
Wealth 150 + changes
As well as overhauling its pricing, Hargreaves secured a number of discounted clean share classes from fund groups as it prepared its business model for the end of commission.
Its strategy has been to push fund groups for the lowest priced share classes they could offer, in exchange for inclusion on a new, streamlined version of its widely-followed Wealth 150 list. The list is then heavily promoted to Hargreaves’ clients – all 528,000 of them.
Its renowned distribution prowess means the offers came in thick and fast – sources said 600 pitches were made to get on a list of just 27 funds.
The average price of funds on the Wealth 150 + list was just 0.54%, an impressive discount to the standard clean price for many of the active funds.
Headline figures hide a lot, with the average skewed by the inclusion of bond funds, which are cheaper than equity funds. However, it is hard to argue with the calibre of the list, which featured managers such as Newton’s Jason Pidcock and Standard Life Investments’ Harry Nimmo.
So will the list be expanded? Not by much, says Gorham, who wants it to remain a select range.
“I cannot see it becoming much larger. It would not double in size or anything like that,” he said. “Our average client only holds five funds and, while a wealthier client may typically hold more than that, we want the Wealth 150 Plus to remain a select list.”
Six-figure battle with HMRC over rebates
The decision by HM Revenue & Customs (HMRC) to levy income tax on rebates means many of Hargreaves’ latest deals with fund groups are subject to the new tax – only nine of its 27 Wealth 150 + deals were done via discounted clean share classes.
Hargreaves and a number of its peers were understandably opposed to the introduction of the so-called ‘discount tax’, with the platform seeking legal opinion and labelling the tax anti-competitive.
Gorham said the company is ready for a long battle with the tax man, having already opted to retain the tax due to the Revenue and hold it on behalf of clients until the case is resolved.
“We are prepared for a court case and will meet the costs of doing that,” he said.
“We think the rebate battle could drag on for 18 months from here, and our prediction is it may cost us £500,000 in legal fees.”
Gorham said the regulator and the tax office are not on the same page.
“We find the current rules inconsistent. The regulator is saying the rebate has to be given to clients as units, and HMRC are saying such a payment is an income. The point is, the rebate is not being treated as something the client has full control over and, if that is the case, how can you then tax it as an income?”
The future of platforms and advice
With RDR out of the way, the platform paper dealt with, and the end of legacy deals some way off – trail on undisturbed investments will continue until April 2016 – what changes does Gorham expect to see now?
Unsurprisingly, he sees further platform market growth as the under-invested population continues to make more provision for its own future.
Gorham said HL itself has seen benefits since the end of RDR as lower net worth clients who advisers no longer deem viable move to manage their own investments.
However, he said he expects the advice market to continue to do “ok”, with RDR having ensured the remaining advice community is high quality.
“I actually think the advised world will do ok. The people left in the market are good,” he said.
“We also see our market growing as the UK population remains under-invested. People have got a bit wealthier – the number of people on our platform with AUM over £100,000 has risen to 25% now, up from 20% a year ago – but we must see a greater take-up of investing from here.”
CV: Ian Gorham
Chief executive of Hargreaves Lansdown.
Chief operating officer of Hargreaves Lansdown.
Head of UK financial services, Grant Thornton UK LLP.
Partner, Grant Thornton UK LLP.
Qualified as a chartered accountant with Deloitte LLP.
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