THE DISRUPTOR
A US giant is swooping in to offer rock bottom fees to investors – now fund chiefs are facing a huge shake-up from...
THE mighty American financial group Vanguard is about to disrupt Britain’s complacent fund management industry by bringing in a low-cost way to invest. Here, The Mail on Sunday explains why its arrival is good news for British investors.
THE world’s second largest asset manager has launched an investment service that will give British investors exposure to the stock market at a rock-bottom price. It will be available online via an investment platform – an account that investors can manage themselves, buying and selling funds when they want. They will also be able to monitor their investments at any time of day or night.
Such fund platforms are already offered by the likes of Barclays, Fidelity, Hargreaves Lansdown and The Share Centre. But investors buying any of Vanguard’s 75 investment and exchange traded funds will pay an annual administration fee of just 0.15 per cent. For investments in excess of £250,000, the annual fee will be capped at £375.
Existing investment platforms are more costly. For example, the biggest, Hargreaves Lansdown, charges 0.45 per cent a year to administer an Isa portfolio. Its founders, Peter Hargreaves and Stephen Lansdown, are now billionaires.
Holly Mackay is founder of website BoringMoney, which compares deals from online brokers and supports greater simplicity and value for money across the financial services industry.
She says: ‘This move by Vanguard is dignified, low-cost disruption, which will set the cat among the pin-striped pigeons.’
Pennsylvania-based Vanguard has been present in the UK funds market for eight years. Quietly, it has attracted £56billion of assets, primarily from financial advisers keen to buy its low-cost funds for clients.
However, this new service makes it much easier – and cheaper – for the public to buy its funds direct with lump sum investments of £500 or more, or £100 monthly.
It also makes it cheaper for investors to buy into the stock market through a vehicle that replicates the performance of an index such as the well known FTSE All-Share. These so-called passive funds have become increasingly popular in recent years, providing investors with a low-cost way to buy into economic growth. Vanguard and BlackRock dominate this sector.
Passive or tracker funds are now preferred by many investors to actively managed funds, where a manager attempts to outperform an index. Many managers – though not all – fail to achieve this, but they still charge investors more for their services in the process.
Someone investing £10,000 in the Vanguard FTSE All-Share unit trust would pay annual fees totalling £23 through its new service. This figure includes the administration fee of £15 and £8 of underlying fund charges. Research by independent analyst Platforum shows the average investor would pay £49.58 a year on a rival platform to hold a fund that tracks the All-Share index.
Unsurprisingly, consumer champions have welcomed Vanguard’s entry into the fund platform market. Nic Round is a chartered financial planner with Treowe Wealth Advisers, based in Shrewsbury, Shropshire. He has long argued that too many investors are paying over the odds for having their investments administered online.
He says: ‘This new service is great for consumers. Hargreaves Lansdown has become the go-to place for do-it-yourself investors. Now, Vanguard offers a simpler option and at less cost.’
ROUND adds: ‘Most people have no idea what costs they are paying to have their investments administered. Such lack of clarity is not on the side of the investor. So when someone like Vanguard comes into the market with a simple, low-cost proposition, it is a breath of openness that is good for consumers.’
Ben Yearsley, director of Plymouth-based financial planning firm Shore, says Vanguard’s arrival is great news for passive investors, as they will see less of their profit eaten up by charges.
But he says: ‘It will have to deliver a knock-out service if it is going to win investors from well-established British rivals such as Interactive Investor, Charles Stanley, Alliance Trust and AJ Bell. An initial drawback is that Vanguard’s online investment service will be confined to its own products.’
It will not allow investors to buy funds from other investment houses, though Vanguard says it has not ruled out offering more fund choice in future.
Also, while investors will be able to use the service to invest their annual Isa allowance – now a significant £20,000 – a self-invested personal pension (Sipp) option is not available. Vanguard hopes to offer it at some stage.
Hargreaves Lansdown appeared unflustered by Vanguard parking tanks on its lawn. This is despite the fact that the company’s share price fell sharply in the wake of Vanguard’s announcement (though it has since bounced back).
Danny Cox, a director of the company, says: ‘Our market leading investment service is renowned for its client focus, exceptional service and value for money.
‘Clients tell us they appreciate the extensive range of shares, funds, investment trusts, exchange traded funds and cash open to them across Sipp, Isa and lifetime Isa accounts – and the option for advice should they need it. Most investors take advantage of the choice available to invest across multiple fund groups.’
There is little doubt that the
charges investors pay for having their investments administered online are likely to fall across the board as a result of Vanguard’s entry into the market.
Justin Bates, analyst at investment bank Liberum, believes the new service will be ‘very challenging for incumbents’ and ‘ultimately result in a price war’.
It is also probable that other charges will fall. The annual fees – often one per cent or more – that big investment houses impose across their investment fund ranges now appear unsustainable.
These charges have already attracted the attention of the Financial Conduct Authority. The regulator believes the costs of investing in UK funds remains too high, with some fees hidden from view.
Jasper Berens is a director of JP Morgan, a big provider of investment funds. He welcomes Vanguard’s move, but believes that price, cost and value are different things and that having choice is of critical importance to investors.
He adds: ‘The fund management groups that will survive and thrive in the future will be those that can innovate, have a range of high-class capabilities and most importantly really understand and can match what their investors want from them.
‘They will need to do this at a fair and transparent price. Serving the investor – the consumer – should be in their DNA.’
BERENS believes that a greater focus on providing investors with specific solutions, such as attractive income and returns above cash in a low-interest rate environment, will create rising demand for investment management.
Charles Plowden is a partner at Baillie Gifford, a London-based investment house that has been cutting fees on some of its investment trusts. He says fund managers with low portfolio turnover, a long-term investment horizon and who engage with the management of the companies they invest in are ‘far more likely to outperform indices after fees’.
Daniel Godfrey is preparing the autumn launch of the People’s Trust, a £100million-plus investment fund that will use a select band of asset managers to pick stocks for the long term. It will aim to produce an annual return of inflation plus five percentage points over rolling seven-year periods.
He says too many funds do not represent good value for money and adds: ‘We will be totally uninterested in index benchmarks. We will be obsessed with investing long term in companies for