Jeff PrestridgeMay 31 2017

Vanguard leads the way on costs

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I recently spent an interesting evening singing for my supper at a dinner arranged by the Investment Network. Stressful, but fun and informative.

The network was set up 10 years ago as a forum for some of the leading figures in the funds industry to talk about the big financial issues of the moment. Over an evening and the following day (occasionally two), fund representatives, leading financial planners and other people involved in the financial services industry fraternise, share the odd drink or three and learn from each other. It is all chaired with aplomb by Clive Waller.

The latest network meeting was held at Woodlands Park Hotel near Cobham in Surrey, a stone’s throw from Chelsea Football Club’s training ground. The subject of the conference was one of the big topics of the moment, value versus price in the financial services industry. Jasper Berens (JPMorgan), Daniel Godfrey (The People’s Trust) and Bill Vasilieff (Novia Financial) were all speaking at the conference.

As I spoke post dinner about the need for greater value in the fund management industry, little did I know that one of the conference’s main participants – American fund giant Vanguard – was about to shake up the fund management industry with the launch of a low cost investment platform in the UK.

Vanguard has now declared its hand with a platform proposition that appears unbeatable on cost

Of course, the company has now declared its hand with a platform proposition that appears unbeatable on cost. It is online portfolio service that will charge an annual fee of just 0.15 per cent with a cap imposed of £375 – thereby reducing the percentage for those with investments in excess of £250,000.

The launch should be welcomed although it is not without flaws. The Pennsylvania-based asset manager will not be offering a Sipp from the word go and the only funds investors will be able to buy from day one are those managed by Vanguard. Most of its funds are passive, tracking specific stock markets. Again, these are underpinned by low charges – charges that make a mockery of some of the fees rival index tracking funds levy.

Why is it good news? For a start, it provides savvy investors – those who are confident to do their own investing – with a low cost, simple and transparent option.

Hargreaves Lansdown, driven initially by the mighty Peter Hargreaves and Stephen Lansdown, has led the way in empowering investors to take charge of their own investment portfolios, but it must now surely take a look at its fees (three times those of Vanguard) in light of this entrant. The same goes for other mainstream platform providers – the likes of Barclays, Charles Stanley, Fidelity, The Share Centre and AJ Bell.

As Nic Round, a chartered financial planner with Treowe Wealth Advisers, told me the other day: "This new service [from Vanguard] is great for consumers. Hargreaves Lansdown has become the go-to place for do-it-yourself investors. Now Vanguard offers a simpler option and at less cost."

Hargreaves Lansdown, naturally, sees things quite differently. It believes its "client focus, exceptional service and value for money" plus its extensive range of investment options and accounts (Isas, Lisas and Sipps) will keep it top of the pile. I am sure it will stay top of the platforms, but it will have to cut charges.

Some commentators believe Vanguard’s move marks the beginning of the end for the active fund management industry. Indeed, Robin Powell, one of the loudest advocates for passive investment management, responded to my initial thoughts on Vanguard’s direct-to-consumer offering by saying it was a "shame" The Daily Mail and The Mail on Sunday had promoted "high fee active funds so aggressively for 30-plus years".

Certainly, Vanguard’s latest assault on the fund management industry – it has already attracted £56bn of investments in the UK, primarily via financial advisers – will once again put the focus on fund charges. Hopefully this will result in some fund groups shaving their margins so as to give investors a better deal. Some, such as Baillie Gifford, are already doing this. More need to follow its lead.

Are we witnessing the slow death of active fund management? I do not think so, although there must surely be more industry consolidation along the lines of Henderson (merging with Janus) and Standard Life’s merger with Aberdeen.

Such consolidation should come with promises that ongoing fund charges fall and also that individual fund numbers are cropped. Not only do we have too many fund groups, but also far too many funds, many offering investors poor value for money in terms of both charges and investment performance.

Although we have read lots about Aberdeen and Standard Life’s executives enjoying rich bonuses as a result of the merger, not a word has been said about the benefits the merger will give fund investors. Surely, charges should fall as the marriage generates huge economies of scale.

Although Mr Powell will not be happy until the funds industry is 100 per cent passive, he is barking up the wrong tree. Where we need to get to is a funds industry that, irrespective of active and passive investment mandates, offers value for money across the board. That is the nirvana we should be striving to reach.

Vanguard, mighty Vanguard, gets us a step closer.

Jeff Prestridge is personal finance editor of the Mail on Sunday