In 2015, David Grimes and the Hargreaves Lansdown IGC, delivered what remains the worst IGC report I have ever reviewed. Things improved considerably in 2016 but the IGC has not kicked on and I find the 2017 report disappointing. It is a good read and has the kind of stock images that would make me feel valued (something that HL do better than anyone other than perhaps SJP). Hargreaves no longer call their workplace product “Corporate Vantage”, it is their HL Workplace SIPP. In terms of innovation, HL are unlikely to be at the front of the queue, they are the market leader at what they do and they will do all they can to keep things that way.

And here I think is the problem. While HL’s report is from an IGC  (and SJP’s isn’t), the SJP GAA are really biting into the neck of their provider to see what blood runs in its veins. The HL IGC report is clubby and nice, but it really is a bit of a chocolate teapot. The status quo must prevail for corporate objectives to be met.

Value for Money

The report rightly focusses on funds – this is what HL does, present funds for investment which are likely to do better than their peers.

The function of the IGC in such circumstances is to ensure that the selection process is good and that the monitoring and communication of that monitoring is also good.

The IGC this year has chosen to include an investment commentary on selected funds which is from HL and not their own work

This is all very well when things are going well, and things are going well for most of the default and core funds under scrutiny. But what happens (as is happening with the Newton Real Return Fund, when the fund underperforms its benchmark.

The fund has achieved its aim of producing cash-beating returns over time, while also sheltering investors’ capital during difficult periods. We believe the fund is an excellent choice for relatively cautious investors seeking a core holding for their portfolios.

Is this good enough when the benchmark is actually rather more serious than beating cash, the displayed benchmark is as follows.

The Fund has and continues to underperform over 1 (1.67), 3 (5.63) and 5 (13.74) years

So what is the IGCs reaction – well there is no reaction. The IGC doesn’t comment on this underperformance and it doesn’t pick up on the gloss given by the HK commentators either. In governance terms, this is as useful as a chocolate teapot and calls into question many of the other judgements in this report.

If performance = value, then fees =money. In the value for money debate, the HL IGC are equally limp on either side of the equation.

They have clearly detailed the costs of the main funds within the HL workplace SIPP

But the level of analysis is very weak. Anyone who thinks that HL are passing on the full discount it gets from IMAs with any of these managers has a very naïve view of platform economics!  HL makes its money from its platform fees (just why the fee for Schroder’s is lower is not explained -typo?). It makes more money from retained margins between the amount it pays through its investment management agreement and what it charges in the fund charge. Is the total margin value for money, we have no analysis other than the feeble.

The IGC notes the platform charge for the HL Workplace SIPP is higher than many other platform providers’. However, members also benefit from HL’s considerable buying power, which enables the default and ABC funds to be offered at significant discounts to members. The result is that the overall charges (platform fee and fund charges together) are not out of line with the market.

The real issue is whether the entire proposition represents value for money and the IGC continues to keep all dimensions of the offering under close review; at present the IGC is happy to confirm the services provided within the platform fee do represent good value for members.

Which is about as rigorous as “£81bn of member’s money can’t be wrong”. Hargreaves Lansdown is a money making machine which is charging 0.75% for a default fund that has a further 0.13% in transaction costs. 0.88% is a lot of money for a fund that has (net of the fund charge has barely beaten its benchmark, and net of all fees has consistently over one, three and five years – underperformed. The impact of all fees on the customer experience in both HL defaults – drives the net performance of HL’s defaults, below the benchmark returns (which are themselves net of fees).

This is not mentioned in the IGC report, nor do we get a clear idea of what is going on with cash management (now under the auspices of a Non-Executive Director). Since the HL default runs into cash, this matters. It would well behove the IGC to demand a clear statement from the NED on what HL actually made from cash last year rather than the insipid

The IGC note that HL has a process in place to ensure that the difference between earnings and the distribution on cash is below the Government charge cap. A fair and competitive rate of interest is distributed and overseen by a Non-Executive Director.

If the level of analysis committed to “competitive” is similar to that elsewhere, then I have no confidence that HL members are getting a fair deal on cash.

The entire section on value for money in this report is feeble. The HL IGC has a duty of care to its members to be rigorous, and the IGC is flaccid. HL are and should remain a shining light for transparency, the flag bearers for MIFID II, fund educators and all round good guys. The IGCs standards need to be commensurately high, they are not, and HL will continue to mint money from their margins – until the IGC asks some serious questions about fees and fund selection and monitoring. I am tempted to give the IGC a red but will stop at an orange. Compared with its first report, this is still good enough, but compared with its potential, the IGC is a VfM under achiever – it gets an orange.

Effectiveness and engagement

This is a well enough written report, there is nothing in it that surprises me or indeed is supposed to surprise. The last section deals with the results of the HL survey where members complain about costs, transparency and investment performance (see above).

There is a degree of complacency evident in the IGCs reaction to these complaints which suggests either a lack of engagement, or effectiveness or both.

HL customers are bound to be more engaged than others, HL offers a non-advised service where customers are buying direct. Unlike SJP, there is no partner or adviser in the way – so policyholders are likely to be using the IGC as its only intermediary.

If I was an HL investor (and at the levels of margin I see within their product – that is very unlikely), I too would be pushing hard for more transparency, putting pressure on fees and wondering just why Newton (and to some extent the default providers) were on the platform.

So while I found the report a good read and offer it a green (for grace), I think it is ineffective and for its lack of push-back on all of the above – I give it a red for clout!