How important is investment transparency to savers?


This is the 5th of a series of eight blogs addressing the eight questions posed by the WPC.

Today’s exam question is

How important is investment transparency to savers?


A short answer is ” a lot more important than most people think!”

Lord make me transparent – but not yet!

I remember going to an event with Dr Chris Sier in a posh hotel in Hampshire. Dr Sier explained why the work he was doing on investment transparency was important. Almost universally , he was derided as being a crank “clients just aren’t interested” one IFA told the audience. Following Dr Sier was Mark Fawcett , CIO of NEST who confirmed the work Dr Sier was doing was important. Dr Sier, who was on the panel asked Fawcett – to demonstrate the transparency point – to tell the audience what NEST was paying for its asset management. Fawcett had to admit that he couldn’t – he had put himself under a non-disclosure agreement.

The story illustrates the two reasons that investment transparency hasn’t yet happened in the UK

  1. Because a lot of people don’t want it to happen (and use people’s ignorance to claim it doesn’t matter)
  2. Because those who could drive transparency find themselves conflicted

Neither reason is good reason,

Why investment transparency matters.

Yesterday, thanks to a tip-off from an insider, I read Hargreaves Lansdown’s preliminary report on its 2018 numbers. Here is what I found

Net revenue on Cash increased by 15% to £42.1million (2017: £36.6m) as increased cash levels offset a slight decline in the net interest margin to 48bps (2017: 49bps)…. cash accounts for 10% of AUA

Of the £90bn Hargreaves Lansdown has on its platform- around 10% is in cash and Hargreaves Lansdown are retaining 48% of the interest earned on that cash for themselves, trousering a cool £42.1m in the process.

The pillage doesn’t stop there, here is the full post , showing how HL intend to increase margins to 60-70 % this year – HL (rather than investors) benefiting from interest rate rises.

Net revenue on Cash increased by 15% to £42.1million (2017: £36.6m) as increased cash levels offset a slight decline in the net interest margin to 48bps (2017: 49bps). This was in line with our communicated expectations at the Interim results announced in February 2018 that margins would be within a 40 to 50bps range. Cash accounts for 10% of the average AUA (2017: 11%). At the start of the year the Bank of England base rate was 0.25% before being increased to 0.50% in November 2017. With the majority of clients’ SIPP money placed on rolling 13 month term deposits, and non-SIPP money on terms of up to 95 days, the full impact of the rate rise takes over a year to flow through. Following the base rate change to 0.75% on 2 August 2018 and assuming no further rate changes, we anticipate the cash interest margin for the 2019 financial year will be in the range of 60bps to70bps. Cash AUA at the end of 2018 was £9.6 billion (2017: £8.1bn).

This is to be found embedded in the shareholder report, in other words – the way that it boasts to the City. You won’t find that number being boasted about to SIPP holders.

It’s all about who has the knowledge

Long term investment depends on fractional charges which can , over time become hugely valuable. Hargreaves Lansdown haven’t always had £90bn under management, they’ve got to where they are by offering a great service -as has St James Place (HL’s principal rival for the nation’s “wealth”.

But there success is built on trust and on knowledge sharing. Hargreaves Lansdown’s clients are among the best informed in the industry. HL has pioneered systems of assessing funds and making fund selection easy enough for people to do it themselves. As such they are a model for “direct investment” – something which is hugely important in getting investment as a recent blog explains.

But all this stuff on funds can be a smokescreen. If you are pocketing 48% of the interest on non invested money, you are profiteering on people’s indecisiveness and deserve to be called on it. Taking half of the interest people should be getting on their savings – just for having that money on your platform – is daylight robbery!

How transparency helps the consumer

I will be sending this blog to the Chairman of the Hargreaves Lansdown IGC for this thoughts. I hope he will be asking Peter Hargreaves and Stephen Lansdown for theirs.

If the opinion is that HL have been caught with their trousers down, I will expect to see next year’s target for the “cash bulking” to be rather lower than the 40-50% in this year’s accounts. If HL see this as “treating their customers fairly – and the IGC agrees”, I will refer the matter to the FCA. If I have totally misunderstood, I will of course apologise!

The same document offers other gems as boasts to shareholders. Look at the net revenue margin on their manager of manager funds – 74bps . The OCF of these funds is 134-144bps and that doesn’t include the platform charge of 45bps!

There is nothing illegal with having 50% margins on your activity, but if the total costs of your fund (including platform charge) is 2% pa, then it’s pretty hard to see how – in a low growth environment, these manager of manager funds , are likely to deliver decent outcomes relative to simpler less expensive fund structures.

Showing the customer what they are buying

The consumer needs to know what they’re paying. If HL can show value from its manager of manager funds that can justify a 2%pa holding charge, then I will supply them with a value for money that will reflect it. age wage simple

Finding the ways that investment manages and platform providers extract value from your investments is a forensic task and not for the faint-hearted.

Dr Chris Sier has been ridiculed for ten years, but now he has been taken seriously by the FCA and his template is now being adopted by the FCA and will soon be adopted by institutional investors keen to know what they are really paying.

Extending that work into the retail space has been the province of two other pioneers, Alan and Gina Miller.

The Millers and Dr Sier have discovered in the retail and institutional spaces, that the same thing is happening. The true cost of managing your money is often considerably higher than what is disclosed in the brochures you read when you invest.

Relying on providers to disclose their costs has meant that many of the costs we actually pay, are hidden. These hidden costs have often been claimed not to exist. Famously, the Investment Association put it about – two summers ago, that these hidden costs were like the Loch Ness Monster.

The IA have since withdrawn this comparison and have even agreed to work with Dr Sier on the FCAs Institutional Disclosures Working Group, from which a template has emerged that will allow us to see what we are paying in charges, over and above those stated in the brochures.

Hopefully, Dr Sier will be able to help people like me to show customers of Hargreaves Lansdown what they are paying compared with what they could be paying within NEST or other SIPPs – and what value they are getting for their money.

Even more importantly, the millions of us who have an estimated £400bn in what the FCA call “non-workplace pensions” – will be able to see what the value for money on these plans actually is.

So long as you remain invested in a pension plan – you are buying its services. In answer to the exam question, understanding the investment costs and the investment value of what you are buying is of continuous importance. If you are finding you are being ripped off, you have the right to withdraw your custom, if you find you are being treated fairly, you have the right to bring money to your fair provider and have them pay you your money back in retirement.

The basis for decision making on how you organise your money going forward, must be based on a proper analysis of what your options are. Without accurate data on the costs and charges and or risk-adjusted performance of the investments you are currently making, how can you hope to make optimal decisions?

A word on the dark web of hidden costs

What goes on within the funds into which we invest has been a secret for as long as I’ve been investing (since 1979).

But the template that Dr Sier and the FCA IDWG has produced, will tease out the hidden costs of fund management exploring everything from bond  to foreign exchange spreads. It will look at the costs of trading, of research costs charge to policyholders and it will explore many other devious costs that eat away at your money.

Already, some of these costs are being published. The last round of IGC reports showed that most workplace pension defaults have hidden (transaction) costs below 0.05%. But there were outliers. This is an extract from the Fidelity IGC report

fidliety IGC

Fidelity’s hidden costs are almost as high as Fidelity’s standard charges! They are at least ten times higher than the Aviva and L&G and Peoples Pension equivalent!

The IGC doesn’t comment on whether these costs are value for money. But if I was a Fidelity investor, I’d be asking the IGC just what I was getting for those transaction costs!

If we can continue to expose hidden costs, whether at Hargreaves Lansdown, or Fidelity of anywhere else, we can help investment managers to drive those costs down. If they cannot drive down costs and cannot justify those costs in terms of added performance, we can choose to take our money elsewhere.

Value for money scoring depends on getting accurate data on explicit and hidden costs. It also depends on getting accurate reporting on gross and net performance using what the asset management industry calls NAV to NAV numbers (net asset value) as well as the gross equivalent. This reporting exists, it is simply not in the public domain.

It’s been a long time coming – but change is gonna come. Within five years i confidently predict that consumers – whether retail or institutional – will be able to make decisions based on transparent reporting of the whole truth – including the stuff that only the shareholders get today!


We needs be vigilant

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, pensions, WPC and tagged , , , , , . Bookmark the permalink.

Leave a Reply