Question
This is a Fund Supermarket / Discount Broker question about a "who does what" and arises from an article I read recently in the Daily Telegraph Saturday April 2 , 2011 on page Y3 of the Money Section .
Emma Wall's article under the sub heading "Forget the Fee" says "Initial charges when you buy a unit trust can be up to 6pc , but use an online platform and often the charge is waived. Platforms such as Fidelity Fundsnetwork , TQ Invest or Hargreaves Lansdown are discount brokers , meaning they absorb the initial charge on many of the funds you can buy through their websites." This surprised me a little and thought further clarification would be useful .I was aware that Hargreaves Lansdown "did both" as it acts as a Supermarket in its own right with its "Vantage" service and also offers a discount with Vantage and with some other providers (like Fidelity).But I was not aware that Fidelity on its own could be classed as a Discount Broker . Clearly competition and evolutionary changes can change the perceptions of what providers like Fidelity do and my own perception could be out of date.
Do you agree with Emma Wall that Fidelity is a discount broker or is it a matter of degree? Is the "division of labour" between the two , blurring at the edges a bit ?.If they are both discount brokers I need to ask myself the question : Why do I need to use one discount broker (Hargreaves Lansdown) to "feed into" another discount broker (Fidelity) !!). I have always regarded Fidelity as a FundSupermarket only but is this a too simplistic an approach in todays market ? To what extent would discount be available going direct to Fidelity?
Is the market slowly moving to simplify the distribution process by going from 3 "hubs" these being :- fund managers , supermarkets , discount brokers to just 2 hubs : - fund managers and "discounting" platforms/supermarkets?
Answer
Let's start by using an analogy (cars) to explain who does what.
Fund providers are like car manufacturers, they make the product. They might also sell their cars direct to public, but usually at the full list price.
Fund supermarkets are like car distributors, they sell the product of many manufacturers. The distributor might sell discounted cars direct to public via its own supermarket, or instead only deal via the trade, selling to smaller dealers.
Discount brokers are like car dealers who buy cars via distributors or manufacturers and trim their profit margin to undercut manufacturer (and maybe car supermarket) prices.
The above doesn't quite translate to funds, but hopefully give you a clearer idea of who does what.
In the fund world confusion can arise because fund supermarkets or 'platforms' might offer their services via different routes.
Some will only deal via financial advisers, including discount brokers, (e.g. Cofunds and Skandia), others only direct to the public (e.g. Hargreaves Lansdown) or, in the case of Fidelity FundsNetwork, a combination of the two.
If we assume the investment choice and service offered by the various supermarkets/platforms is similar, then what really matters is whether you want to get advice (in which case you'll probably end up on the platform preferred by your financial adviser) or you prefer to shop around for the best discounts.
Most discount brokers use third party fund supermarkets, such as Cofunds or FundsNetwork. The amount of discount given is determined by the discount broker and basically depends on how much fund commission (typically 3% initially and 0.5% annually) they wish to give up.
Discount brokers who run their own fund supermarket, i.e. Hargreaves Lansdown, have a bit more pricing power as they also pocket the fee fund supermarkets charge fund providers for featuring in their supermarket, typically 0.25% a year. This means they can rebate some trail commission while still making a healthy margin, albeit they incur the expense of running the supermarket.
When Fidelity FundNetwork sells direct to the public it is effectively acting as a discount broker for its own supermarket (like Hargreaves Lansdown), but not a very competitive one. There are no trail commission rebates and initial charges average 1.25%, so Fidelity is keeping a lot of commission for itself. You'll almost certainly save more money buying via a third party discount broker - I can't think of any reason why you'd want to buy direct from FundsNetwork.
With more fund supermarkets/platforms likely to be launched over the next couple of years by both fund providers and advisers/discount brokers, the marketplace will invariably become even more cluttered and confusing. And yes, the distinction between fund providers, discount brokers and fund platforms could, in some instances, become blurred.
But as a customer all that really matters is seeking out the best deal and service for your needs and this shouldn't change despite an evolving market.
And if you do make a decision that you later regret it's normally straightforward to move investments from one platform to another. Just bear in mind that Cofunds, FundsNetwork and Skandia continue to treat customers unfairly by not allowing them to transfer their ISAs 'as-is' (i.e. re-register) to another platform - customers will instead have to incur the expense and hassle or selling the investments, transferring cash and repurchasing on the new platform. The FSA has said this practice must end by the end of 2012.
This is a Fund Supermarket / Discount Broker question about a "who does what" and arises from an article I read recently in the Daily Telegraph Saturday April 2 , 2011 on page Y3 of the Money Section .
Emma Wall's article under the sub heading "Forget the Fee" says "Initial charges when you buy a unit trust can be up to 6pc , but use an online platform and often the charge is waived. Platforms such as Fidelity Fundsnetwork , TQ Invest or Hargreaves Lansdown are discount brokers , meaning they absorb the initial charge on many of the funds you can buy through their websites." This surprised me a little and thought further clarification would be useful .I was aware that Hargreaves Lansdown "did both" as it acts as a Supermarket in its own right with its "Vantage" service and also offers a discount with Vantage and with some other providers (like Fidelity).But I was not aware that Fidelity on its own could be classed as a Discount Broker . Clearly competition and evolutionary changes can change the perceptions of what providers like Fidelity do and my own perception could be out of date.
Do you agree with Emma Wall that Fidelity is a discount broker or is it a matter of degree? Is the "division of labour" between the two , blurring at the edges a bit ?.If they are both discount brokers I need to ask myself the question : Why do I need to use one discount broker (Hargreaves Lansdown) to "feed into" another discount broker (Fidelity) !!). I have always regarded Fidelity as a FundSupermarket only but is this a too simplistic an approach in todays market ? To what extent would discount be available going direct to Fidelity?
Is the market slowly moving to simplify the distribution process by going from 3 "hubs" these being :- fund managers , supermarkets , discount brokers to just 2 hubs : - fund managers and "discounting" platforms/supermarkets?
Answer
Let's start by using an analogy (cars) to explain who does what.
Fund providers are like car manufacturers, they make the product. They might also sell their cars direct to public, but usually at the full list price.
Fund supermarkets are like car distributors, they sell the product of many manufacturers. The distributor might sell discounted cars direct to public via its own supermarket, or instead only deal via the trade, selling to smaller dealers.
Discount brokers are like car dealers who buy cars via distributors or manufacturers and trim their profit margin to undercut manufacturer (and maybe car supermarket) prices.
The above doesn't quite translate to funds, but hopefully give you a clearer idea of who does what.
In the fund world confusion can arise because fund supermarkets or 'platforms' might offer their services via different routes.
Some will only deal via financial advisers, including discount brokers, (e.g. Cofunds and Skandia), others only direct to the public (e.g. Hargreaves Lansdown) or, in the case of Fidelity FundsNetwork, a combination of the two.
If we assume the investment choice and service offered by the various supermarkets/platforms is similar, then what really matters is whether you want to get advice (in which case you'll probably end up on the platform preferred by your financial adviser) or you prefer to shop around for the best discounts.
Most discount brokers use third party fund supermarkets, such as Cofunds or FundsNetwork. The amount of discount given is determined by the discount broker and basically depends on how much fund commission (typically 3% initially and 0.5% annually) they wish to give up.
Discount brokers who run their own fund supermarket, i.e. Hargreaves Lansdown, have a bit more pricing power as they also pocket the fee fund supermarkets charge fund providers for featuring in their supermarket, typically 0.25% a year. This means they can rebate some trail commission while still making a healthy margin, albeit they incur the expense of running the supermarket.
When Fidelity FundNetwork sells direct to the public it is effectively acting as a discount broker for its own supermarket (like Hargreaves Lansdown), but not a very competitive one. There are no trail commission rebates and initial charges average 1.25%, so Fidelity is keeping a lot of commission for itself. You'll almost certainly save more money buying via a third party discount broker - I can't think of any reason why you'd want to buy direct from FundsNetwork.
With more fund supermarkets/platforms likely to be launched over the next couple of years by both fund providers and advisers/discount brokers, the marketplace will invariably become even more cluttered and confusing. And yes, the distinction between fund providers, discount brokers and fund platforms could, in some instances, become blurred.
But as a customer all that really matters is seeking out the best deal and service for your needs and this shouldn't change despite an evolving market.
And if you do make a decision that you later regret it's normally straightforward to move investments from one platform to another. Just bear in mind that Cofunds, FundsNetwork and Skandia continue to treat customers unfairly by not allowing them to transfer their ISAs 'as-is' (i.e. re-register) to another platform - customers will instead have to incur the expense and hassle or selling the investments, transferring cash and repurchasing on the new platform. The FSA has said this practice must end by the end of 2012.
Read this Q and A at http://www.candidmoney.com/questions/question452.aspx
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