When platforms offer only a restricted view

Do fund charges – and what they are used for – really matter, as long as they are disclosed? Do fund investors really want another column devoted to this, or (after that opening sentence) can we declare the matter closed? Sadly, it’s not so simple. So here we go again.

Two weeks ago, in this column, I set out an addendum to the FT Fund Fees Manifesto, as suggested by fund management group Fidelity. It proposed that private investors be told the ‘Total Cost of Ownership’ (TCO) – not just a fund’s annual management charge (AMC), but also what an online fund platform charges for buying and holding that investment. Apart from some selective worked examples – which gave Fidelity’s index tracker fund a low TCO, and certain rivals’ rather inflated costs – it received a positive response. I didn’t get the hundreds of e-mails that Merryn routinely elicits, but those readers who did write were supportive.

Then, last week, in a separate article, I reported concerns about the lack of disclosure of rebates from fund managers to online fund platforms – the amount of a fund’s AMC that is given to a platform for offering that fund for sale. It contained this reassurance from Ian Gorham, chief executive of Hargreaves Lansdown (HL), the UK’s biggest platform for direct investors: “We never accept money to promote a fund or promote one over another because of what we receive.” It also received a broadly positive response – apart from e-mails from two fund managers asserting that this claim was false.

For business confidentiality reasons, they didn’t wish to be named, so let’s call them Fund Manager A and Fund Manager B. This is what they had to say.

Fund manager A:

You quote Ian Gorham as saying “we never promote one fund over another because of what we receive”. That is quite simply incorrect, as I can demonstrate. We have three classes of shares, one of which pays no trail commission. This [no commission] class is not available on [HL’s] Vantage system but the class which does [pay commission to HL] is available. That class only became available on Vantage after we agreed to increase the share of commission that HL receives from X per cent to X per cent [details withheld]. The only way we got onto Vantage was to up the bung to them.

Fund manager B:

[HL was] not willing to show us on their website as we’re not willing to pay 60 per cent of AMC! 90bps! Basic message at the end is it’s okay to load the fund with initial charges (i.e. screw the client) but not okay to reduce their part of the AMC.

Fund manager B provided e-mails to and from HL which appeared to back this up, including this exchange:

Fund manager B: “We have a number of funds under the [withheld] name on the HL platform but it has been pointed out to me that they are impossible to locate.”

HL: “The fund is not listed on our website which is why you cannot find it… You may recall that you were unable to agree to our terms of a 60 per cent rebate of the AMC.”

Fund manager B: “Currently, the fund is available at [withheld] per cent AMC. Can we please change this to [withheld] per cent AMC (ie. there will be 0.5 per cent trail [commission]).

HL: “With regards to the trail commission, I am afraid we cannot move to this lower level. Currently, [withheld] is considerably below our standard pricing terms – we normally need minimum of 60 per cent of the AMC in rebate to host a fund on our platform ie 60bps AMC with a 90bps rebate to HL.“

At first glance, it looks as if HL does require money to promote a fund. So I put this to Ian Gorham. And, yes, you guessed it, it’s not so simple. “To clarify, if a fund is on our platform and its performance warrants it, we will promote it. By ‘promote’ I mean give it space on the website and in the Investment Times [newsletter] and perhaps put it on the Wealth 150 [a list of funds selected by HL analysts]. We never, ever, promote one fund over another because of the terms. It is purely performance based. Of course, not every fund in the world is on Vantage but there are over 2,500 to choose from. I think we can morally be given a tick in the box for choice. We have more funds than any other platform. We do not restrict clients’ choice.”

I believe him on fund performance – I’ve visited HL and seen the detailed computer analysis they do. I believe him on the number of funds – there are more than you’ll find on other platforms. I even think he deserves an extra tick for giving discounts on fund charges – delivering savings of £180m to private investors last year.

But, by definition, any platform – not just HL’s – must restrict investors’ choice if it only offers funds with a high enough AMC to be able to cough up nearly 1 per cent just to be included. To be fair to HL, it also carries a number of lower cost funds, and allows investors to pay the extra 0.5 per cent to cover its costs.

However, if the starting point for promoting funds is a universe of the most expensive, how does this help investors – or, for that matter, low-cost fund managers?

matthew.vincent@ft.com