A giant cuts its tracker costs -- but not for ordinary investors.
Roll the clock back a few years, and Legal & General (LSE: LGEN) had a pretty good name in the index tracker market. In contrast to, say, early entrant Virgin, the firm offered a decent spread of trackers, as well as lower costs.
And when it comes to index trackers, as you've read here many times, costs are everything. Which is why, of course, trackers from low-cost providers Vanguard and HSBC (LSE: HSBA) have done so well over the last few years.
Indeed, from a standing start in 2009 when it first entered the UK, Vanguard now has around £3 billion in funds under management, Vanguard's head of retail, Nick Blake, told me when we chatted yesterday.
And since famously dropping its charges in response to Vanguard's entry to the UK, HSBC has seen its own tracker funds under management double, from less than £1 billion to over £2 billion.
Charges cut
But among retail investors, the 800-pound gorilla in the tracker industry is still Legal & General, with the firm's best-selling FTSE All-Share UK Index tracker ranked as the country's largest.
And yesterday, it too dropped its charges, slashing both its Annual Management Charge (AMC) and some of the costs that go into the Total Expense Ratio (TER) calculation.
As an example, the firm's flagship FTSE All-Share UK Index tracker now has an Annual Management Charge of 0.2%, and a TER of just 0.22%. Which is pretty impressive, although not quite at Vanguard levels.
Good news, then, for those of us who like choice, competition and low costs in the tracker market?
Not quite
Alas, things aren't so simple. Although the firm has cut tracker costs right across its range, the lower costs will only benefit investors buying through fee‑based advisers, and held on the sort of platforms that are used by such advisers -- Cofunds, for instance, and the institutional arms of Standard Life (LSE: SL) and Alliance Trust Savings.
"Over the last two to three years, Legal & General has experienced a strong increase in demand for our passive investments, notably from fee‑based advisers," says Simon Ellis, managing director of Legal & General's investments arm. "This review of the pricing structure means advisers will get a better deal when using our index funds to construct client portfolios."
In other words, in advance of the implementation of the recommendations of the Retail Distribution Review, IFAs have been piling their clients into low-cost trackers -- and Legal & General has recognised that, to get its share of the market, it has to drop costs to the levels charged by Vanguard, HSBC and others.
Unfair
But retail investors, in short, won't benefit one jot -- even if they hold their Legal & General trackers on platforms such as Alliance Trust Savings.
Which means -- to be blunt -- that investors that like you and me are in effect subsidising wealthier folks. And, as the holder of a specialist Legal & General tracker that has seen a cut in charges, I'm naturally disappointed.
When I spoke to Legal & General yesterday, its spokesperson was keen to state that "pricing is always under review". But, tellingly, he was also keen to stress that whatever the outcome of any review, retail investors weren't going to see any cost reductions any time soon.
What's needed
What will it take for Legal & General to cut charges for retail investors? Two things, as far as I can see.
As the firm points out, the trackers in question don't paying trailing commission. Buy an equivalent "retail" tracker on, say, a platform like Hargreaves Lansdown (LSE: HL), and part of the TER goes to Hargreaves in the form of a trailing commission. That's one reason why Hargreaves' newly introduced platform fee is lower for Legal & General trackers.
So if -- as has been mooted -- the Financial Services Authority bans trailing commission, retail investors can logically expect to see tracker costs come down.
But, just as importantly, retail tracker investors need to make their views known. And one way of sending a signal is by switching out of Legal & General trackers into alternatives that are cheaper.
Yet, sadly, many retail tracker investors seem content to stay where they are. As HSBC's Andy Clark put it when I spoke to him: "In terms of new money, people are coming to us and Vanguard first. But in terms of existing tracker investments, many people don't really know what they're paying -- and until investors start voting with their feet, there's little incentive for such providers to start cutting costs."
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More from Malcolm Wheatley:
> Malcolm holds trackers with HSBC, Vanguard and Legal & General.
