The low fee mantra – a look at the results of Hargreaves Lansdown

Firstly an apology to regular readers of Retirement Investing Today. My life outside of this blog has recently become extremely busy. It’s going to take me a couple of weeks to get everything sorted out which unfortunately means for the next couple of weeks posts are going to be very sporadic if I manage any at all. Please bear with me as once everything is back in control the regular posts will reappear.

Now onto the topic of today. My investing strategy is in my opinion quite simple. It is largely strategic asset allocation, with some tactical asset allocation thrown in for good measure. This tactical asset allocation is centred on adjusting my equity weightings depending on cyclically adjusted PE ratios (CAPE or PE10). I follow 3 PE10’s – the ASX 200 , the FTSE 100 and the S&P 500 actively and invest based on 2.

On top of this I am obsessive about minimising fees and taxes. When combined with compound interest I believe they are a killer. For example I minimise annual charges, carefully consider any funds that have upfront charges and trade very infrequently. If you are interested in the damage fees can do then here is an investing mistake I believe I made in the past. Also I need to always remind myself that I am trying to minimise fees and taxes not fees or taxes.

Today I have about 65% of my low charge portfolio invested tax efficiently and my fees on average are at 0.58%. I even think 0.58% is high but I am struggling to reduce it largely because I am stuck with my employers pension scheme which while having many benefits in my opinion it also comes with the big negative of high fees.

I recently posted about the opportunity I may be getting to set up a low cost SIPP with the current pension pot that I have. This included an in depth look at the Hargreaves Lansdown Advantage SIPP, Sippdeal SIPP and the Alliance Trust Select SIPP. Hargreaves Lansdown were quickly eliminated as a place for my money as I believed that they wouldn’t provide me with a low cost SIPP for my investments. Sippdeal and Alliance Trust both have pro’s and con’s but I believed I could run either of these SIPP’s for 0.3% to 0.38% per annum. This would then significantly reduce by total portfolio costs.

It was therefore interesting for me today that Hargreaves Lansdown announced their 2010 preliminary results. It appears as though many people out there disagree with me about Hargreaves Lansdown. Or maybe they are just on average not worried about fees. Of course they offer more than just pensions but my 0.58% portfolio cost also includes ISA’s and of course non-tax efficient investments (100%-65%) of 35% of my portfolio. They also offer financial advice (and other advisory services) but in my opinion this cost must also be counted towards the total cost of running your portfolio as in the end only one person ends up paying for it, the customer. It’s therefore interesting for me to compare my portfolio costs with those of the average Hargreaves Lansdown customer. My analysis is by no means perfect because I guess some people will pay for advice but invest elsewhere making my approach very much worst case however hopefully it demonstrates a point. They currently have £17.5 billion of assets under management. From this they generated revenues of £159 million. This means the average customer is paying 0.91% of their portfolio to Hargreaves Lansdown per annum. Don't forget that's not the total charges to the customer either because if he buys an ETF or some other fund he then has to pay an annual charge on this also which goes to whomever the product provider is. That sounds like a lot when compared to my 0.58% which I am working hard to reduce further. Of course my percentage is a little higher as this is only my annual management cost. I also do the odd trade however even considering this cost it probably would annually only add a further 0.05% or so.

Now the interesting bit. On that £159 million they made an adjusted profit before tax of £90.7 million. That is an adjusted operating profit margin of 56.5%. I’m sorry but given the industry I am in I find that a very large number! Instead of huge profits let’s hypothesise that instead they want to make a ‘fair’ profit and also look after their customers investing interests by minimising their fees. In my line of work a ‘fair’ profit is say 10%. For this they add 10% to their costs of £68.3 million to arrive at £75.1 million of revenues. With £17.5 billion of assets that would only be total annual charges of 0.43%. That sounds a bit better to me!

As always do your own research.