Hargreaves versus the “vanilla solution”.

henry tapper

9 years ago

I was amused when opening Linked in this morning to find a pension leads salesman offering “clients who had got compensated for fault SIPP investment and were looking to adviser to provide them with a “vanilla solution”.

Just what the leads salesman knew about vanilla solutions or indeed about advisers is a matter of speculation. But any adviser who is buying leads to advise the once bitten twice shy would do well to look at what Vanguard announced yesterday.

Vanguard’s news is the game changer

Vanguard are offering their investment platform (administration to the older ones of us) at 0.15%, this compares with 0.45%pa for Hargreaves Lansdowne ( a reasonable market benchmark). Vanguard are offering “vanilla” funds at 0.15% , a third of what you’d pay for passive management on other platforms and a smaller fraction of the fees being charged by active managers. What’s more- you can DIY invest, by-passing advisory fees that can put another 1% pa on the bill.

The news was enough to wipe 8% off the value of Hargreaves Lansdown’s share price (on a day when the FTSE 100 broke the 7500 barrier). The general deflation in prices of platform and fund managers operating in the UK retail market suggests the market knows this is significant. It is surprising- the Vanguard announcement having been well heralded- that not more of the impact had been built into stock prices.

The fall in share price presages three shifts

A shift in new flows away from advisory platforms with active funds
A shift of existing advisory assets to Vanguard (and similar)
A reduction in prices and margins at advisory platforms to compete.

Just how fast this will happen is also a matter for speculation. Vanilla funds sound unattractive when there is tutti-frutti at the stand. The trusted relationships built up by advisers will enable advisers to re-sell their services to troubled customers and much of the retail money flowing to advisers is coming from defined benefit pension schemes and will stay with advisers under “conditional” deals.

Hargreaves are right to tell the market they have been getting away with it for years and will continue to. For many people a stockbroker or an IFA who behaves like one, has a cachet not matched by Vanguard’s one dimensional approach.

Whether its for the razzle-dazzle of tutti-frutti fund management or the social cachet of “wealth management”, the funds industry and its platforms – has fight in it yet! But it has been hit below the water line – it will not be the warship it was.

Transparency

Today there’s a “transparency symposium” of the “transparency taskforce” and I will be there. I will look forward to hearing what other delegates make of the Vanguard announcement and the speed they think , the changes I’m foreseeing- will happen.

The general view of the room will be interesting re. the parts of the market that will be impacted. The last game changer for the HNW community was the collapse of Equitable Life- which accelerated the remarkable rise of Hargreaves Lansdown and in its wake St James Place and the vertically integrated wealth managers.

Vanguard’s proposition has much of the virtue perceived in the Equitable – low cost, non-advisory and upfront in its dealings. Of course the Equitable turned out to be anything but a transparent organisation but it is hard to see the Vanguard’s weakness, The folly of the Equitable’s downfall was that its management did not react quickly enough to the new economic climate of low inflation and interest rates and continued to assume its invincibility.

The empires built on fund platforms and the massive margins within active funds look equally vulnerable today.

The vanilla funds, so avidly requested by the leads salesmen, may be more than a passing fad. In my view, the Vanguard announcement will do more for transparency in fund management than any other single event this so far this decade.

How others react and change their business , will be extremely interesting. I am intending to be an early user of the new Vanguard “vanilla solution”.

Vanguard’s news is the game changer

Transparency

Further reading

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