Amazingly, yet more charges. But there's a cheaper tracker for small investors.
It's fair to say that the imposition of a platform fee by fund supermarket Hargreaves Lansdown (LSE: HL) has attracted a lot of criticism from aggrieved investors and pension savers.
As I explained last week, investors in popular low-cost trackers -- such as those offered by HSBC (LSE: HSBA) -- will now have to pay a fee of either £1 per month per holding, or £2 per month per holding, in order to hold these funds.
Why? Because in short, such funds aren't otherwise profitable enough for Hargreaves Lansdown. And while the firm is sugaring the pill with talk of additional fund listings, such as Vanguard's range of trackers, small investors are going to be hit hard.
It gets worse
However, Hargreaves now seems to have blinked -- but in the process, revealed an additional layer of platform fee charges of which investors were previously unaware.
Yesterday, the firm offered a concession to some investors: instead of imposing the new platform fee from 31 December, the fee would be levied from 29 February.
Why? Because the investors in question held a significant number of funds that would attract the new platform fee, across SIPPs, ISAs and trading accounts. And the additional two months, says Hargreaves Lansdown, provides a window of opportunity for such clients to reorganise their portfolios so as to reduce the charges that they pay.
But the letter offering this gesture contained a sting in the tail.
One account, two charges
Investors who have transferred pension schemes from past employment into a Hargreaves Lansdown SIPP are quite likely to have what are called 'protected rights' pension funds, arising from a decision to contract out of the State Second Pension (S2P), or its predecessor, the State Earnings‑Related Pension Scheme (SERPS).
From the client's perspective, as far as Hargreaves Lansdown's SIPPs go, the distinction is largely academic.
They have one SIPP with one account number; one SIPP total fund valuation -- but which is made up of two sub-totals: an 'ordinary' SIPP sub-total, and a 'protected rights' sub-total. Funds are held in each pot, in other words, and add up to the total value of your SIPP.
And here's the killer: hold a low-cost tracker in your protected rights pot as well as your 'ordinary' pot, and Hargreaves Lansdown is going to charge you twice. That's right: one account; two charges -- for the same tracker, in the same SIPP.
And looking at my own SIPP, I see that I'm on the hook for £13 a month -- a whopping £156 a year.
So what can I -- and other investors -- do about these charges? Particularly investors with relatively small holdings, such as my friend with around £2,000 in an ISA containing HSBC's FTSE All-Share Tracker?
Time to think
One option is to ask for the same 29 February extension, in order to contemplate moving to the Vanguard trackers that Hargreaves Lansdown is talking about with increasing levels of confidence. The letter offering the 29 February extension, in fact, explicitly mentions Vanguard.
My friend did just this -- and was told 'no', in no uncertain terms. Here's the response, in fact:
“We have only offered this [extension] to a small number of clients who hold a large number of funds that will begin to attract the platform fee from 31 December 2011.
This was to allow these clients time to reorganise your portfolio, if they wished to do so. As such, we are not prepared to extend this offer to you.”
The BlackRock option
What Hargreaves Lansdown is doing, though, is drawing its clients' attention to the range of trackers that it offers from fund giant BlackRock.
Now, with a TER of 0.57% for BlackRock's FTSE All-Share tracker, I wouldn't normally look twice at such funds. That's more than twice the TER of HSBC's equivalent tracker, for example.
But crucially, there isn't a platform fee to pay. Which from a total-cost perspective, makes the BlackRock products cheaper for small investors.
Why isn't there a platform fee? Because some of that whopping TER goes to Hargreaves Lansdown, in the form of trail commission.
Cheaper, but with a spread
Doing the maths, it turns out that for holdings of less than £8,000, it's worth switching to BlackRock, as the additional TER will be less than the £24 you'll pay for the equivalent HSBC product.
So should investors such as my friend with the £2,000 ISA simply switch to BlackRock, then? Alas, it's not that simple.
The BlackRock trackers also have a bid-offer spread (unlike their HSBC and Legal & General (LSE: LGEN) equivalents). What's more, it's a spread that's far from insignificant.
That said, it's not as bad as it first appears: as canny blogger Monevator points out, included in the offer price is the initial charge that investors pay -- which in this case, is fully rebated by Hargreaves Lansdown.
This reduces the spread, but doesn't eliminate it.
Personally, as I've said before, I'm not doing anything yet. In particular, I'm not going to switch into BlackRock, only to then switch into Vanguard.
So I'm going to hang on until the Vanguard situation becomes a little clearer -- and thanks to the 29 February extension, I've got the wiggle room to do so.
I'm also waiting to see what HSBC and Legal & General do in response to the platform fee.
But if you're a small investor who is due to be levied the platform fee from 31 December, time is short. And so I'd certainly take a look at the BlackRock products.
More from Malcolm Wheatley:
Malcolm and his delightful wife Mandy are Hargreaves Lansdown clients, and hold trackers from HSBC and Legal & General. Malcolm also holds trackers from Vanguard.