Question
May I ask a question in respect of using fund plaforms to hold investment portfolios.My wife and I hold our equity and fixed interest interest investments on Hargreaves Lansdown's Vantage platform. These are in the form of unit trusts.
H/L's customer service is impeccable, however we make all our own investment decisions and are aware other platforms offer a cheaper way of holding unit trusts through rebating most or all of the trail commissions. We are attracted by Cavendish who use Fundsnet work and seem to offer a much more attractive deal than H/L.
Next year new rules come into effect in respect of rebating trail commission and we are wondering if it would be wise to hold fire on transfering until the exect position is clearer. There are cost implications in making the transfer and would take time to recoup this cost in higher rebates not with standing any change in the rules on rebates.
The other isssue is in regard to the business model of Cavendish Online. I understand they are a small business indeed I have read they only employ 4 people and I wonder if their business model is secure and likely to endure. We would hate to be faced with having to move to another platform with the cost implications etc.
In these circumstances what would your advice be Justin in respect of:
a) waiting until the situation on rebate of commissions becomes clearer,
b) do you have a view on Cavendish On Line and their longer term stability or on other offerings such as
Alliance Trust?.
I realise it may be difficult to address the second question for obvious reasons but any general guidance would be appreciated.
By the way Justin your web site is excellent and I often visit it to cover basic points and opinion on investment. Answer
Thanks for the kind words re: the site, glad you find it helpful.
There are two big issues that could affect fund platform pricing. The first is the FSA banning platforms from receiving payments from fund managers, due to implemented by the end of 2013. The second is the potential banning of sales commissions on execution only transactions (i.e. via discount brokers when you don't receive advice), which I suspect the FSA will implement over the next year or so, although nothing definite as yet.
It's simplest to illustrate the potential impact of this with a an example.
Let's assume a fund charging 1.5% a year. Hargreaves Lansdown (HL) likely receives about 0.25% of this as a platform fee from the fund manager and another 0.5% as trail commission, so receives about 0.75% a year in total (in practice the figure appears to be a bit higher). From this HL typically rebates about 0.1-0.2% as a loyalty bonus and pockets the rest to pay for its service and turn a very healthy profit.
Assume fund manager payments are banned then we'd expect the annual fund charge to fall to 0.75%. HL would then charge customers directly for using its platform. If HL is to maintain its margin I'd expect an annual fee of around 0.6%, but I've no idea what it'll actually be in practice. The main point is there'll inventively have to be an explicit fee of some sorts, although that doesn't mean overall cost will necessarily change from now.
All fund platforms will be in the same boat, so very interesting to see what will happen. The likes of Alliance Trust Savings have arguably already built in this type of pricing, as they rebate all commissions and platform fees in favour of explicit annual and dealing fees - generally a very good deal for modest to larger sums if you don't trade very frequently.
Cavendish Online is an interesting example as it currently offers a full commission rebate and collects just 0.05% a year (i.e. £5 per £10,000 invested) from FundsNetwork as its fee. However, the FundNetwork platform fee is currently paid by fund managers, once this is banned you'll likely have to pay FundsNetwork directly. FundsNetwork's current 'unbundled' model charges 0.25% plus £45 a year (potentially £45 more than currently if our example fund charge falls to 0.75%). However, too soon to tell how the Cavendish Online deal would be affected, I suspect they'll negotiate a waiver on the £45 FundsNetwork fee to leave clients more or less on the same overall deal as now - we'll have to wait and see.
Is it worth waiting to see how charges potentially change before transferring? I suspect you'll need to stay put for up to a year for new charging structures to unfold, so tot up whether the commission saving over that time would outweigh the transfer costs (there should be no cost to sell your funds then transfer cash across and reinvest at the other end, but HL charges £30 per fund is you want to transfer across 'as is'). If it's marginal I'd stay put for now, else if you'd still end up saving then there seems little downside to transferring if you feel it's the right decision for you.
As for Cavendish Online's business model, it's firmly in the pile them high and sell them very cheap category. Margins are wafer thin, but Cavendish keeps a tight lid on costs (hence minimal staff) and appears to be a profitable business. I doubt they'll ever rival HL's c£150 million annual profit, but equally I'd be surprised if they ever went bust based on their current proposition.
In any case, because Cavendish Online is simply a discount broker and not the platform owner there's little risk involved. If they did go bust your money would remain unscathed with FudsnNetwork, although you'd have to appoint another discount broker as agent - and based on current competition the deal may end up more expensive than via Cavendish.
In the case of platform owners such as Alliance Trust Savings there is potentially a bit more risk, albeit still small overall. For more details see my article concerning nominee accounts.
May I ask a question in respect of using fund plaforms to hold investment portfolios.My wife and I hold our equity and fixed interest interest investments on Hargreaves Lansdown's Vantage platform. These are in the form of unit trusts.
H/L's customer service is impeccable, however we make all our own investment decisions and are aware other platforms offer a cheaper way of holding unit trusts through rebating most or all of the trail commissions. We are attracted by Cavendish who use Fundsnet work and seem to offer a much more attractive deal than H/L.
Next year new rules come into effect in respect of rebating trail commission and we are wondering if it would be wise to hold fire on transfering until the exect position is clearer. There are cost implications in making the transfer and would take time to recoup this cost in higher rebates not with standing any change in the rules on rebates.
The other isssue is in regard to the business model of Cavendish Online. I understand they are a small business indeed I have read they only employ 4 people and I wonder if their business model is secure and likely to endure. We would hate to be faced with having to move to another platform with the cost implications etc.
In these circumstances what would your advice be Justin in respect of:
a) waiting until the situation on rebate of commissions becomes clearer,
b) do you have a view on Cavendish On Line and their longer term stability or on other offerings such as
Alliance Trust?.
I realise it may be difficult to address the second question for obvious reasons but any general guidance would be appreciated.
By the way Justin your web site is excellent and I often visit it to cover basic points and opinion on investment. Answer
Thanks for the kind words re: the site, glad you find it helpful.
There are two big issues that could affect fund platform pricing. The first is the FSA banning platforms from receiving payments from fund managers, due to implemented by the end of 2013. The second is the potential banning of sales commissions on execution only transactions (i.e. via discount brokers when you don't receive advice), which I suspect the FSA will implement over the next year or so, although nothing definite as yet.
It's simplest to illustrate the potential impact of this with a an example.
Let's assume a fund charging 1.5% a year. Hargreaves Lansdown (HL) likely receives about 0.25% of this as a platform fee from the fund manager and another 0.5% as trail commission, so receives about 0.75% a year in total (in practice the figure appears to be a bit higher). From this HL typically rebates about 0.1-0.2% as a loyalty bonus and pockets the rest to pay for its service and turn a very healthy profit.
Assume fund manager payments are banned then we'd expect the annual fund charge to fall to 0.75%. HL would then charge customers directly for using its platform. If HL is to maintain its margin I'd expect an annual fee of around 0.6%, but I've no idea what it'll actually be in practice. The main point is there'll inventively have to be an explicit fee of some sorts, although that doesn't mean overall cost will necessarily change from now.
All fund platforms will be in the same boat, so very interesting to see what will happen. The likes of Alliance Trust Savings have arguably already built in this type of pricing, as they rebate all commissions and platform fees in favour of explicit annual and dealing fees - generally a very good deal for modest to larger sums if you don't trade very frequently.
Cavendish Online is an interesting example as it currently offers a full commission rebate and collects just 0.05% a year (i.e. £5 per £10,000 invested) from FundsNetwork as its fee. However, the FundNetwork platform fee is currently paid by fund managers, once this is banned you'll likely have to pay FundsNetwork directly. FundsNetwork's current 'unbundled' model charges 0.25% plus £45 a year (potentially £45 more than currently if our example fund charge falls to 0.75%). However, too soon to tell how the Cavendish Online deal would be affected, I suspect they'll negotiate a waiver on the £45 FundsNetwork fee to leave clients more or less on the same overall deal as now - we'll have to wait and see.
Is it worth waiting to see how charges potentially change before transferring? I suspect you'll need to stay put for up to a year for new charging structures to unfold, so tot up whether the commission saving over that time would outweigh the transfer costs (there should be no cost to sell your funds then transfer cash across and reinvest at the other end, but HL charges £30 per fund is you want to transfer across 'as is'). If it's marginal I'd stay put for now, else if you'd still end up saving then there seems little downside to transferring if you feel it's the right decision for you.
As for Cavendish Online's business model, it's firmly in the pile them high and sell them very cheap category. Margins are wafer thin, but Cavendish keeps a tight lid on costs (hence minimal staff) and appears to be a profitable business. I doubt they'll ever rival HL's c£150 million annual profit, but equally I'd be surprised if they ever went bust based on their current proposition.
In any case, because Cavendish Online is simply a discount broker and not the platform owner there's little risk involved. If they did go bust your money would remain unscathed with FudsnNetwork, although you'd have to appoint another discount broker as agent - and based on current competition the deal may end up more expensive than via Cavendish.
In the case of platform owners such as Alliance Trust Savings there is potentially a bit more risk, albeit still small overall. For more details see my article concerning nominee accounts.
Read this Q and A at http://www.candidmoney.com/questions/question759.aspx
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