Reply to: Cavendish Online for Pensions?

[pmeswani]

Ignoring for the moment that performance history is completely irrelevant, since that's a separate argument, what information does Hargreaves provide that isn't on free sites like www.trustnet.com?

Is that information worth paying hundreds or thousands of pounds a year in extra charges for?

If Hargreaves does provide unique information, (though I doubt it,) why not open a Hargreaves account with next nothing in it, get the information for free, and actually hold your investments elsewhere?

Take it easy IR35 Avoider. No need to get wound up. Some people prefer Hargreaves than other providers. Just because they cost a bit more, it doesn't mean they are as bad as you are making out. Also, one does not need to register with Hargreaves to get the same level of information that provided by trustnet. As I said... take it easy.

[pmeswani]

No, the phrase I've highlighed in the quote is wrong, that was the exact point of my earlier post comparing charges. Hold exactly the same fund with different people and the annual management charge can be different. In the case of my example, on a £100,000 investment held for 30 years you pay £69,000 more with Hargreaves than you do with Alliance. That £69,000 saving is the cumulative advantage of paying 0.5% less in annual charges.

Fund managers pay kickbacks (initial commission and trail commission) out of their charges to companies like Hargreaves, Sippdeal, etc. who put business their way. Some providers (such as Hargreaves) pay some of this back to the customer by reducing the initial and/or annual charges. Alliance (I think) promise to not to keep any annual commission for themselves. (It's far more important to reduce annual than initial costs, since in the long term annual charges compound, but Hargreaves mainly reduces initial, I think.)

Note that the use of the term "kickbacks" by me is deliberately non-standard and perjorative: the industry term is "commission."

The point of using Cavendish online for certain one-off purchases (such as opening a pension account with an insurer) is to get these kickbacks eliminated, since Cavendish promise to take nothing except their fixed administrative fee. They will either get you lower charges or pay you the cash they receive.

The "kickbacks" system is why Sippdeal and Hargreaves can claim to charge no fee for running Sipps. They make their money from the fund managers when people invest in funds. I get a free ride with Sippdeal, because I take advantage of their free account but then invest in things that don't pay kickbacks. Hargreaves discourages people like me by charging an annual fee to people who don't invest in funds that pay kickbacks. If you look at Hargreaves charging structure, you easily deduce their annual fee is in fact £200 plus VAT, and you pay it even if it doesn't explicitly appear on your statement, in the form of the higher management charges out of which kickbacks are paid. Unfortunately the extent of the damage is not limited to that, as my example showed, the higher charges to the managers will ultimately cost you tens of thousands and conceivably more than a 100,000 pounds in completely unnecessary extra charges in the long term.

If memory serves me correctly... doesn't BOS have a hand in sippdeal?

[Fred Bloggs]

Hmmm, I've been looking at the Cavendish unit trust SIPP offering, they use the "Fidelity funds supermarket" to manage the funds purchased within the SIPP. Given that there are three folks wanting their ongoing cut out of your SIPP cake (Cavendish, Fidelity and the unit trust managers you choose (Neptune, Invesco Perpetual, Rathbones, Artemis etc...)) I cannot see how the Cavendish SIPP can compete on costs with HL. For lowest ongoing costs I suspect Alliance are the cheapest SIPP. But I find HL suits me just fine right now and I think that the OP will do just fine at HL.

[Colourful Contractor]

Thanks for everyone's views, they have given me a good basis for enquiring into different options.

I have decided to go with a HL SIPP, very different from my initial choice of Aviva stakeholder through a discounter.

I like the flexibility and breadth of funds this offers, whilst being able to easily monitor performance. This is important to me and i have realised that it doesn't have to be as daunting as I first imagined. I am going to make initial ltd co payments asap (need to get in before year end) and hold in cash till I work out where I want to invest.

Certainly I would not use an IFA, the advice offered by the two I have spoken to has been dire and largely based around their returns as far as I can tell.

[Fred Bloggs]

Thanks IR35 Avoider, that clarifies what you're saying. I agree with you that a firm who rebates ALL annual fees ongoing will be cheaper overall. As you say, HL rebates everything from the upfront charges. I wouldn't buy unit trusts if I had to pay the 5 to 6% upfront fees. I also agree that there is nothing unique on HL's website except for their own in house views which, IMO, are influenced very much by who is paying them to say things. That bit of HL is very far from transparent actually.

[IR35 Avoider]

Does an average 1.25% AMC through HL seem like good value on a SIPP?

As others have pointed out, the charges can really eat into the investment over time.

Once you've decided what funds to invest in, you can easily look up on Hargreaves or Alliance or Sippdeal site to see who is generally cheapest. (It's possible that one might be cheap for some funds and not others, but I doubt it. I suspect Alliance will always come out cheapest, if you calculate the actual cost over a number of years.)

A more fundamental question you need to ask is how much you should be willing to pay fund managers. My answer to this question makes me automatically rule out nearly everyone on the lists published by Hargreaves, Sippdeal or Alliance. I suggest you read a good investment book like "A Random Walk Down Wall Street" or "The Four Pillars of Investing." to get some basic grounding in the issues.

There is no alternative to acquiring your own undestanding of investing, since the interests of the "experts" (fund managers or advisors) you might think you can pay to make decisions for you are not only not aligned with doing what's best for you, sometimes they're in direct opposition.

Investing is an interesting but very perverse field of knowledge: it's the only one where paying experts to help you is almost certain to make you worse off than if you hadn't.

Essentially, in investing, you "get what you don't pay for." In other words, the only effect of paying for someone to stand between you and the underlying assets and take a fee, is for your returns to decrease by the amount of their fee. I don't have the energy to argue this in full in this forum, though in almost any investing forum nearly everyone will mostly agree with this, and nearly every major investing book will tell you the same thing. ("A Random Walk" was first published in 1973, and is in something like its nineth edition now.)

[IR35 Avoider]

I stand corrected. It's in a PDF document. However, I prefer H&L's way of showing information about Funds. At least I can view the history of a fund's performance before I invest in it.

Ignoring for the moment that performance history is completely irrelevant, since that's a separate argument, what information does Hargreaves provide that isn't on free sites like www.trustnet.com?

Is that information worth paying hundreds or thousands of pounds a year in extra charges for?

If Hargreaves does provide unique information, (though I doubt it,) why not open a Hargreaves account with next nothing in it, get the information for free, and actually hold your investments elsewhere?

[IR35 Avoider]

Admittedly, there are the annual fund charges underlying this, but you pay those whatever way you hold the unit trusts. HL make no additional charges.

No, the phrase I've highlighed in the quote is wrong, that was the exact point of my earlier post comparing charges. Hold exactly the same fund with different people and the annual management charge can be different. In the case of my example, on a £100,000 investment held for 30 years you pay £69,000 more with Hargreaves than you do with Alliance. That £69,000 saving is the cumulative advantage of paying 0.5% less in annual charges.

Fund managers pay kickbacks (initial commission and trail commission) out of their charges to companies like Hargreaves, Sippdeal, etc. who put business their way. Some providers (such as Hargreaves) pay some of this back to the customer by reducing the initial and/or annual charges. Alliance (I think) promise to not to keep any annual commission for themselves. (It's far more important to reduce annual than initial costs, since in the long term annual charges compound, but Hargreaves mainly reduces initial, I think.)

Note that the use of the term "kickbacks" by me is deliberately non-standard and perjorative: the industry term is "commission."

The point of using Cavendish online for certain one-off purchases (such as opening a pension account with an insurer) is to get these kickbacks eliminated, since Cavendish promise to take nothing except their fixed administrative fee. They will either get you lower charges or pay you the cash they receive.

The "kickbacks" system is why Sippdeal and Hargreaves can claim to charge no fee for running Sipps. They make their money from the fund managers when people invest in funds. I get a free ride with Sippdeal, because I take advantage of their free account but then invest in things that don't pay kickbacks. Hargreaves discourages people like me by charging an annual fee to people who don't invest in funds that pay kickbacks. If you look at Hargreaves charging structure, you easily deduce their annual fee is in fact £200 plus VAT, and you pay it even if it doesn't explicitly appear on your statement, in the form of the higher management charges out of which kickbacks are paid. Unfortunately the extent of the damage is not limited to that, as my example showed, the higher charges to the managers will ultimately cost you tens of thousands and conceivably more than a 100,000 pounds in completely unnecessary extra charges in the long term.

[Fred Bloggs]

Does an average 1.25% AMC through HL seem like good value on a SIPP?

As others have pointed out, the charges can really eat into the investment over time.

What charges?

From the page below-

HL Charges page.

Annual charge-

0% on cash and over 2,000 funds.

Admittedly, there are the annual fund charges underlying this, but you pay those whatever way you hold the unit trusts. HL make no additional charges.

[Colourful Contractor]

Does an average 1.25% AMC through HL seem like good value on a SIPP?

As others have pointed out, the charges can really eat into the investment over time.

[Fred Bloggs]

Though I am with HL, I was very happy to use Alliance for a number of years and would be happy to use them again.

Regarding the tracker funds, a very contentious POV I know, but I do tend to put my money with the managers who have the long term market out performance track record. These managers do exist, but you need to find them. I find the HL site very good in this respect. I keep my choice of funds to around a dozen so that I can keep a close eye on them. Presently, I have just one dog of a fund that I might well bail out of, Artemis Global Growth. It's been terrible.

As was suggested above, I do have a significant exposure to emerging economies but this is through a couple of global growth funds and a commodity fund rather than via dedicated emerging market funds. These funds were terrible last year but are rebounding strongly this year so far.

At age 52, I plan a steady move into income generating assets and "absolute return" funds over the next 10 to 15 years though as capital values increase on my growth funds. (I hope).

[Colourful Contractor]

I stand corrected. It's in a PDF document. However, I prefer H&L's way of showing information about Funds. At least I can view the history of a fund's performance before I invest in it.

Agreed, makes it easy to compare funds.

However, taking IR35s point, i am concerned with AMC and their impact on the returns you may get. The lowcosts were one of the things that attracted me to stakeholders, but obv not good value if you get lousy growth.

Not seen much below 1.25% amc after discounts on HL website, does this seem right? The charges IR35 mentions seem much lower through AT?

[pmeswani]

I won't pretend to understand Alliance Trust's model, but it appears that you are comparing apples with pears. The self select option seems to be a more cut down version compared to what Hargreaves Lansdown are offering. Also, it is a lot harder to find out about the charges on specific funds without being a member of the Alliance Trust SIPP. Very Cloak and Dagger. Alliance Trust may appear cheaper, but at least H&L are not hiding their opinions behind some lock and key mechanism.

I stand corrected. It's in a PDF document. However, I prefer H&L's way of showing information about Funds. At least I can view the history of a fund's performance before I invest in it.

[pmeswani]

To compare Hargreaves Lansdown and Alliance Trust Savings, I looked up the price of holding a fund I kind of like, but can't obtain at a price I'm willing to pay. The fund is "Schroder Income Maximiser." Alliance Trust charges 1.22% initial fee and 1% annual, Hargreaves Lansdowne charges 0% initial and 1.5% annual (when held in a SIPP, 1.3% otherwise.) A £100,000 investment that grows at 7% a year (that fund's official target) for 30 years will yield, after charges, £567,342 with Alliance Trust, compared to £498,395 with Hargreaves Lansdown. (Illustration of how I did the calculation: £100,000*(100%-1.22%)*(100%+7%-1%)^30 = £567,342.)

So Hargreaves Lansdown charges £69,000 more than Alliance Trust on a £100,000 initial investment, in this example.

Incidentally, the figures involved in this example are not unrealistic: for me with 30 years to go until I have to buy an annuity and more than £100,000 currently in my pension, they understate the differences.

This comparison only includes fund charges, I've ignored any overall charges for operating the account, which I assume will make a negligible difference, since both are competing in the market as cheap SIPP providers.

It's interesting that I often see Hargreaves recommended on the basis of cost, but I don't think most people understand how much a little extra on the fund annual management charge costs them in the long run. (In fairness, I think it's only very recently that Alliance started refunding trail comission, making themselves cheaper.) It's currently my policy never to pay more than 0.5% per year for fund management, and with Vanguard launching funds in the UK, co-incidentally currently only easily available via Alliance Trust, I can foresee myself tightening this criterion to 0.3% a year.

This example is not meant to show Hargreaves is bad, on the contrary they might make third place on my overall list of providers, rather it is meant to illustrate the importance of cutting annual fund management charges to the bone. I think Alliance Trust are currently in the lead on this criterion.

I know this is a contentious opinion, but you can arguably get all the equity exposure you need with just two funds, Vanguard UK tracker which charges 0.5% initial and 0.15% annual, and Vanguard world excluding UK tracker, for 0% initial and 0.3% annual.

The 0.5% initial charge on Vanguards UK fund is to cover stamp duty on shares, as long as your holding period is more than a couple of years they will still work out cheaper than other tracker funds that don't charge an initial fee. Vanguard is the worlds biggest and cheapest fund manager and are highly ethical. They explicitly charge stamp duty so that one set of investors (frequent traders) doesn't end up being cross-subsidised by another set, long-term holders. Also, I think they include all expenses in their quoted fee, whereas most other managers charge some ancillary expenses in addition.

I won't pretend to understand Alliance Trust's model, but it appears that you are comparing apples with pears. The self select option seems to be a more cut down version compared to what Hargreaves Lansdown are offering. Also, it is a lot harder to find out about the charges on specific funds without being a member of the Alliance Trust SIPP. Very Cloak and Dagger. Alliance Trust may appear cheaper, but at least H&L are not hiding their opinions behind some lock and key mechanism.

[IR35 Avoider]

I think the cheapest way to invest in equities is via Vanguard funds with Alliance. (Vanguard only launched in the UK in July so hopefully it is only a matter of time before they are available with other providers as well.) Assuming 7% growth again, £100,000 split 50:50 between UK and rest-of-the-world trackers and invested for 30 years becomes £712,854 after charges with Vanguard funds. The same strategy using equivalent iShare ETFs becomes £670,816.

The iShare option costs the same in management charges whether you use Sippdeal, Alliance or Hargreaves. The annual account charges are cheapest with Sippdeal, but I haven't bothered to calculate how much difference the cost of reinvesting dividends makes. (I implicitly assumed that cost was zero in arriving at the £670,816 figure, so that figure slightly overstates the return.)

Edit: OK, assuming quarterly reinvestment of dividends of about £1000, I think the annual Account and brokerage charges for the iShare option would be as follows:

Sippdeal: £0 + 4 * £14.95 = £60.
Alliance: £75+VAT + 4 * £12.75 = £136.
Hargreaves: £200+VAT + 4 * £14.94 = £290.