In the world of stocks and shares, £1 might not seem like a lot of money. Yet fund supermarket Hargreaves Lansdown’s (HL’s) recent decision to charge tracker funds an extra £1, or even £2, a month sparked a wave of criticism. But now the broker is back on the charm offensive and has unveiled some new low-cost products in a bid to attract thrifty investors.
The reason so many investors got annoyed was that trackers are one of the most popular and cheapest fund investments around. Because they passively track a particular index, trackers are cheaper than more actively-managed funds, where a manager tries to beat to beat a benchmark. Indeed, a typical tracker has a total expense ratio (TER) of around 0.5%, compared to an average 1.68% for actively-managed equivalents. When you consider that few actively-managed funds beat the index in the long-term, it is understandable that many investors prefer trackers.
However, these low-cost trackers aren’t always popular with the people who sell them. With active funds, HL gets a kickback from the provider for every customer it signs up. But with most tracker funds the fees are already so low that there is often no rebate. And that’s probably why the firm decided to stick on the monthly charge. The move also comes as the regulator, the Financial Services Authority (FSA), is trying to change the industry via its Retail Distribution Review so that brokers earn upfront fees rather than hidden commission.
So what is HL’s new offering? It has teamed up with Scottish Widows to offer a new FTSE All Share index fund with a TER of just 0.11%. That compares well with popular existing trackers, such as Fidelity’s MoneyBuilder UK Index fund, which has a TER of 0.3%.
It will also offer 12 of American tracker-provider Vanguard’s funds. That will allow the broker to offer more UK, US, global and bond trackers to its customers. It has also come up with a way for investors to get around the new tracker charges by cutting a deal with investment group BlackRock that will allow you to invest in its tracker funds without paying the extra monthly fees. Admittedly BlackRock’s funds are more expensive than other trackers – for example, the FTSE All Share tracker has a TER of 0.57%. But “the absence of the platform fee may make it more cost-effective for investors with smaller amounts of money”, says Gavin Lumsden in CityWire.