Jan 192014
 

Hargreaves Lansdown has finally unveiled its new charging structure to comply with the impending ban on platform receiving trail commissions from funds. As with other firms, this represents a major shake-up of its business model for funds, but the impact on equity investors was limited. The major changes are:

  • The custody fee for equities, ETFs and investment trusts in an ISA or SIPP was cut to 0.45% per year, from 0.5%, in line with the new charge for funds. The caps of £45 for an ISA and £200 for a SIPP remain unchanged.
  • Investment trusts held in a regular dealing account will also be charged at 0.45% (max £45), as in an ISA. The new charge does not apply to shares and ETFs. This decision seems to be proving unpopular along clients and understandably so. It might reflect a fear that clients could begin switching out of open-end funds (especially non-trail paying ones where custody fees were relatively low under the old model, but will now be 0.45%) into investment trusts.
  • There is now a £10+VAT fee for some corporate actions (rights issues and other events “requiring us to seek and act on your instructions”).
  • Closing an account will now carry a £25+VAT fee.

The new charges will take effect from 1st March (with the exception of the account closure fee, which comes in from June). I have updated Hargreaves Lansdown’s entry in the broker directory and the UK online stockbroker table.

The impact on investors who hold funds will be much greater. Many should be better off, as the combination of the 0.45% custody charge and lower TERs on clean share classes of funds should mean lower total costs than on the old commission-paying share classes. However, some investors – for example those who hold Vanguard index funds, which didn’t pay trail and were previously subject to a fixed custody charge of a few pounds per year – will often be much worse off, as they will now attract the uncapped 0.45% fee.

I’ll overhaul the UK fund supermarket table when brokers have finished announced their revised pricing; at the moment, the industry is in flux and picking a platform is difficult because there is little clarity on which will still look cheap in a few months. In the meantime, Justin Modray’s Candid Money is doing an excellent job of tracking what each broker has announced so far on funds.

Jan 102013
 

The temporary but large reduction in funds available for investment on the Alliance Trust Savings platform – give quite high profile coverage in the Daily Telegraph – is another example of why picking a new fund supermarket requires caution while the effects of the Retail Distribution Review are still working their way through.

I am not inclined to castigate ATS too much over this – it is reacting to RDR and the platform review far more pre-emptively than most of its peers and it’s to be commended for moving to clean pricing as quickly as possible. Perhaps the change could have been better communicated, but ATS seems to have a fairly comprehensive RDR changes page to update users on progress.

The new terms on fund charges [PDF] generally look significantly better. Obviously, you need to allow for ATS’s charges on top of the clean fees, but seeing some firms already bringing their fees down on a transparent basis should hopefully drive competition across all platforms. Continue reading »

Nov 132012
 

The FSA’s Retail Distribution Review (RDR) is set to shake up investment costs in the UK enormously over the next year or so. With effect from January 2013, financial advisers will no longer be able to receive trail commission – ongoing payments from fund groups – on new investments.

More importantly for DIY investors, the FSA is then likely to ban fund platforms for receiving trail commission with effect from January 2014. This means that the fees currently charged by many execution-only firms will have to change drastically.

Once that happens, many of the details in this site’s UK fund supermarket comparison table will change significantly. Unfortunately, exactly what fund supermarket pricing will look like once RDR is complete isn’t clear, making it hard to choose a new provider at the moment.

However, many of the major fund platforms have now announced their “unbundled” charging schemes – unbundled meaning that they must transparently and explicitly charge the investor for their services, rather than getting paid a platform fee in the background out of trail commission. And this is beginning to give us some idea of what fees may look like in a year or so. Continue reading »

Oct 212012
 

Citywire is reporting proposals by Barclays to counteract the FSA’s forthcoming Retail Distribution Review ban on funds paying trail commission to intermediaries, by trying to charge the fund providers “administration fees” for having their products on its platform.

Whether the FSA will permit this isn’t clear, but the idea seems to go against the initial spirit of RDR. The FSA’s professed goal is for all the costs to be transparent to the client – they should be paying explicit charges for using the platform, as a flat fee or percentage of their holdings. Not imposing these and instead charging opaque admin fees to providers is not significantly different to the current system of trail commission.

It’s hard to argue that this comes out of the provider’s own margins – that simply means that rather than management fees falling to (say) 0.75% to reflect what the fund firm currently gets, they will just fall to (say) 1% to cover the extra payment that the firm must make to the platform. It will be an implicit share of the fees rather than an explicit one, but the same outcome. Continue reading »

Oct 282011
 

This is the second part of a review of Asian income funds and emerging market income funds for UK investors, focusing on investment trusts. Click here for Asian income funds – unit trust and oeics.

Asian income funds – investment trusts

There are three Asian income investment trusts in the UK market. And it shows how keen investors now are on the income theme that none trade at a significant discount to net asset value (NAV) – for most ITs, a small discount to NAV is normal.

The Aberdeen Asian Income Fund (LN:AAIF) has a rather different geographic focus to the funds we’ve already looked at in part one – it’s much more geared to Southeast Asia. Singapore is the single biggest holding at 20%, followed by Australia and then Malaysia and Thailand. It doesn’t include a sector breakdown in its factsheet, but I estimate that the biggest holdings are the familiar duo of financials and telecoms at 25% and 20% respectively

Continue reading »

Oct 282011
 

Asian income funds and emerging market income funds may sound like a contradiction. After all, Asia and emerging markets are supposed to be growth investments. So why turn to a growth market for income?

In fact, Asian income and emerging market income are themes that make a lot of sense when choosing funds, for several reasons.

First, emerging market dividends are no myth. Many emerging markets stocks now have a culture of paying high dividends, so they make up a major part of investment returns in several countries. Dividends accounted for 30% of Asia ex Japan returns over the past decade – about the same as in developed markets.

Continue reading »

Holding foreign funds and ETFs in an ISA

 FAQs
 

UK investors are often unsure about the rules for holding foreign funds and exchange traded funds (ETFs) in an Individual Savings Account (ISA).

The regulations on foreign shares are clear. These are eligible for an ISA if they trade on a recognised stock exchange. But funds – especially ETFs – never seem so simple. Even the ISA providers sometimes disagree on what’s eligible.

HMRC has a short list of ISA eligible investments online, but it still leaves some points unclear. So I asked HMRC’s ISA specialists to confirm some of the less straightforward situations.

In general, their answers mean that most foreign funds and ETFs will not be eligible, although there are a couple of exceptions. For the details, read on.

Continue reading »

Avoid the tax trap on foreign funds

 FAQs
 

The UK and the US have very harsh rules on taxing profits from foreign funds. Both will tax any capital gains you make from most foreign funds at income tax rates rather than capital gains tax rates.

These rules were originally brought in to stop investors reducing their income tax by rolling the income up in an offshore fund and taking it as a capital gain. Since capital gains tax rates are usually lower than income tax rates, doing this could save a lot of tax.

So the authorities cracked down. Unfortunately the rules are very broad and catch many investors who simply want to invest in a fund abroad because an equivalent fund isn’t available at home.

The result is that foreign funds are usually very unattractive for US investors, because the tax penalties can wipe out any gain. For UK investors, the situation isn’t quite so bad – but they should stick to foreign funds with a special tax status where possible. Let’s look at the details for both.

Continue reading »

Aug 192011
 

Most investors understand that the fees they pay to fund managers have an impact on their investment returns. But it’s easy to overlook quite how large that impact can be. It’s also easy to focus on the wrong fees – putting a lot of effort into reducing one, when it’s the other that matters more.

So exactly how much do fees matter and what should you do to cut costs? Let’s take a look at a real example.

Before we begin, let’s recap what fees we’re looking at. There are two different sets of fees that fund management firms normally charge. One is the entry fee or initial charge, a one-off fee levied when your investment goes into the fund. The other is the annual management charge, which is levied on a recurring basis.

There are some other possible fees to keep in mind. For example, an exit fee might be charged when you withdraw your money or a performance fee levied when returns pass a certain hurdle. But these are less common and so we’ll leave them out for simplicity.

Continue reading »