Hargreaves move heralds era of pressure for fund managers

John Kenchington

The UK’s biggest fund broker last week unveiled a survival plan for the new regulatory world, and I must say bravo.

A triumph of British entrepreneurialism, Hargreaves Lansdown is a Bristol-based fund shop that has gone from a two-man, bedroom-based startup to a FTSE 100 investment broking giant in its 33-year history.

The engine that powered the firm’s success was its ability to offer its clients discounted rates on the initial and annual management charges they paid to invest in funds. The typical equity fund would charge 5 per cent initially and then 1.5 per cent a year in fees. Through Hargreaves, you could often buy the fund with no initial charges and annual fees of close to 1.25 per cent.

Article continues after advert

That was possible because fund managers would offer to waive parts of the fees they took from clients of the fund, handing the proceeds back to Hargreaves, which could then hand a portion of that rebate back to its clients nicely packaged up as a ‘saving’.

The fund managers did this because Hargreaves was such a big client gatekeeper, offering access to vast sums of investment. Tools such as Hargreaves’ research-based Wealth 150 list of ‘preferred’ funds helped make asset managers toe the line and stump up good rebates.

But then things changed. The FSA banned fund managers from handing any payments to platforms, to cut out the potential for conflicts of interest.

Hargreaves’ survival plan is to retain its ‘discount broker’ image by forcing fund managers who still want to be sold well to stump up attractive client-only rebates and new super-cheap share classes for it to offer investors.

Last week, the platform revealed that it had secured deals that meant the average fund on the Wealth 150 list would charge just 0.65 per cent a year to Hargreaves clients, versus standard fees of 0.76 per cent.

In theory nothing really changes – Hargreaves still offers discounted funds while intermediaries continue to sell advice and investment management services at a premium rather than obsessing about fee basis points. But the fact is the scale of the fee cuts involved here mean fund managers are going to be taking home much less in fees than they did in the old world of bundling.

Hargreaves seems to have negotiated some formidable deals from managers who want airtime on the platform, and that’s going to put pressure on margins. Most major brokers, platforms and intermediaries such as private client managers are not going to sit idly by – they will want cut-price funds too.

I’d expect to see some tightening of belts in the fund manager industry as their margins come under full-bore attack from all angles. Clients are effectively being held to ransom – and fund managers will have to cough up with increasingly low fees if they want access.