Vertical disintegration

vertical disintegration

14 of the largest insurer offering pension plans have agreed to publish the true costs of the funds they off to people buying the personal and company pensions they run. These funds sit on “platforms” which provide investment administration , keep records and provide information on the pension pots people build up.

The information they will publish will not be about the platforms but about the funds that sit on the platforms. According to the FT’s Norma Cohen, the cost of the funds on these platforms varies enormously.From passive funds which  give virtually free access to stock markets (but little management beyond giving the return on the market) to actively managed  funds there can be as much as fifty times as much cost.

“Cost” refers to what experts call “portfolio turnover” and covers buying and selling , taxes like stamp duty, legal and custodial fees and so on. Amazingly passive funds can actually have negative costs – they can make money out of lending out the stock in their funds while active managers lose money from the cost of the manager’s endeavours.

“Charge” in this context refers to the amount the fund managers levy to the fund for managing the money. Charges for passive management are much lower than for active managers but not by the same factor as costs.

In the past we have only seen the impact of “charges” not of “costs”, when we see the impact of costs we will be able to understand what people like Norma Cohen and David Pitt Watson have been going on.

I think that the truth will also reveal how expensive it is for individual’s to manage their own pensions compared to the inexpensive management offered when many individuals have their pension pots managed collectively. More on this will will come out when the OFT publish the results of their recently launched study into these matters but there is already a growing body of evidence that suggests that in terms of understanding charges “we ain’t seen nothing yet”.

Which brings me onto the title of this blog “vertical disintegration”. Vertical integration is a phrase used by finance people to describe a business that owns all stages of the buying process from finding customers, telling customers what they want through to delivering the solution and looking after the customer going forward.

The prime example of a vertically integrated business in Britain is the phenomenal Hargreaves Lansdowne. HL is a financial commentator , if you wake up to money you’ll often here Tom McPhail or Mark Dampier , they provide advice on the best funds to use and they’ll give you a way of introducing those funds into your portfolios and managing them in and out of your financial products over time.

I have no objection to vertical integration , especially when it is well practiced as I believe it to be with Hargreaves, Fidelity and a few other firms.

Where virtual integration falls apart and becomes virtual disintegration is where the integrator becomes the regulator and starts laying down the law. Especially when it starts laying down the laws that govern its own activities, especially when its activities are under investigation by firms such as the Office of Fair Trading.

At this point, I feel a conflict coming on like a big winter cold!

And this is where I link the section of this blog on charges to the section on virtual integration. You see Hargreaves are very worried about pressure on charges. They are concerned that too greater a focus on costs will dampen interest in value (outperformance net of charges).

But what is clear is that we cannot measure value unless we know what charges are and the measure we have of charges is incomplete – the insurers now admit this). For all we know , the charges on some funds are so high that they offer no value at all.

For Hargreaves Lansdowne to argue that we are concentrating too much on charges, they must give us an assurance that we are completely in the picture on the charges of the funds on their investment platform.

As with the insurers, I am happy that I know what the platform costs are and I’m happy I know what the fund managers are charging for their services, but do I know the total costs of the funds offered by Hargreaves Lansdowne on their platform? No I don’t!

Not only do I not know now, but I’m not likely to know any time soon as the funds they offer are generally not the funds that the 14 insurers offer. The funds HL offer are not insurance funds though the insurers will invest in the funds that HL do offer.

IF Hargreaves Lansdowne want to commentate on the amount of time we should be spending rattling on about costs and charges, they should allow us to understand the costs of the funds they offer as well as the charges. In the way the 14 insurers have promised to do.

Until they do, I hope that they will keep quiet  (on this )  and not promote the idea that ignorance is bliss.

They of all people know that it isn’t – after all they are the good guys and no-one wants to see another hero toppled.

 

 

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in auto-enrolment, David Pitt-Watson, dc pensions, hargreaves lansdowne, pensions and tagged , , , , , , , . Bookmark the permalink.

17 Responses to Vertical disintegration

  1. Dan Zwicker says:

    Transparency in the matter of costs is not likely in a field that operates in an ambiguous atmosphere. The human touch has a cost. Time for the industry to operate on an open and direct basis. A concern with a balance sheet must include a client centric focus.

    The market is moving from Professional Transactional Sales to Professional Advice. An ‘Advisor’ has a fiduciary duty to each client. That includes transparent behaviour in the matter of the management of costs.

    Those firms which fail to adapt will disappear.

    Respectfully,

    Dan Zwicker
    Toronto.
    Daniel H. Zwicker
    B.Sc. (Hons.) P.Eng. CFP CLU CH.F.C. CFSB

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  2. Dan Zwicker says:

    Hi Henry, I enjoyed your article and posted it on my blog with a comment. Here is he link. http://dzwicker.blogspot.ca/2013/01/transparency-in-costs.html All the best! Dan.

    Daniel H. Zwicker B.Sc. (Hons.) P.Eng. CFP CLU CH.F.C. CFSB

    Professional Engineers Ontario Certified Financial Planner Chartered Life Underwriter Chartered Financial Consultant ChartereredFinancial Services Broker Bus: 416-726-2427 Email: Linkedindanzwicker@rogers.com Linkedin: http://www.linkedin.com/in/danzwicker Daniel H. Zwicker, CFP Blog: http://www.dzwicker.blogspot.com FFCG Blog: http://www.dan-zwicker.blogspot.com Beyond Risk Blog: http://www.beyondrisk.blogspot.com Specialists in Advanced Life Insurance Applications and Lifetime Sustainable Retirement Planning Solutions ”Raising The Bar’

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