Platform Costs – Do they Matter ?

I have used Hargreaves Landsdown as my Pension & Investing platform for over 4 years. Yes they have higher fees than many and a dubious record in recommendations (which I ignore anyway), but I have been fairly happy.

I am one of those people that really does not mind paying ‘a bit more’. I have pet irritations about tardy service, long phone call waits, days to answer correspondence and frankly have better things to do than chase a platform provider just to save a few quid.

Except it really is not just a few quid … depending on the types of investment, it can run into many £100s or even rather higher.

I fundamentally don’t like %fund fees and charges. Go to a financial advisor and typically they will charge a percentage of the total funds. Do they really do twice the work for twice the funds ? No… so I use fixed fee if at all.

But HL has a capped structure and a grading down from 0.45% depending on total size and up to now I really just have not bothered.

But things have changed !!!

One of the great lessons of businesses that keeps being lost, is that people are largely loyal and don’t move providing they do not extract the mickey (too much) and crucially, provide great service.

I am now having the same issues with my bank to a point that I am seriously considering moving after almost 40 years !

So what has changed at HL ? … well…. Covid 19 of course and the seemingly endless excuse for not answering the phone or emails. It used to be I called and it was seconds, action was pretty much instant. A Secure Message (SM) was never more than a couple of hours. Now though, it is 40 mins of some cheerful recording saying how busy they are, a variable SM response from next day to 2 weeks.

Meanwhile, they keep charging me 0.45% platform fee for a non premium service.

I used to subscribe to Money Observer. A monthly mag on financial stuff. I did so as it had some quite insightful articles that just made me think, or explore (and I got used to sitting in the garden with a coffee and some cake with it .. bliss).

No mag is up to date and you could never take investment advice from one, which is why largely that is not what was printed. Covid accelerated its decline and it essentially merged (I think) into the Interactive Investor (ii) platform. As a thank-you and goodbye I got a years free platform use so thought I would open a Trading Account (already maxed out my ISA) just to have a play.

So far, nice platform and really good staff response. I was not going to take things further until HL just got so shoddy and poor I really am now thinking about a substantive move.

What did it was a holding I have had a General Meeting to vote through some financing and change. No-where could I get access to any of this on HL and to say the SM response was like running through treacle would be an understatement. Contrast with ii and once I enabled voting on the app, had a full vote sheet with all resolutions the day after the RNS online through my browser – perfect !

As for fees, well I pay nothing until September next year and even then it will only be a fixed monthly fee amounting to around £100 a year. The size of my holdings being irrelevant.

So I am thinking about a big change next year, or at least a dual platform arrangement. And since I was doing that I thought I would look at the impact of costs on investment.

There is nothing new to the notion that costs are a drag. It is self evident that if an annual return is 5% and fees are (1%), then the total real return is 4%, ie 20% lower.

So put simply, if I invest £100,000 at 2% growth and 2% yield for 20 years I get the following numbers:

First with platform costs of 0.45%, then with 0.40%, ie a difference of 0.05%

So taking NET income, I have 3.3% more and re-investing I have 4.2% more and a fund that is 1.0% higher.

So the impact of 0.05% in fees over a 20 year period is:

Taking Net Income = 6.5x
Reinvesting = 8.5x and a fund impact of 1.0x

By these numbers I mean (for example) 6.5x 0.05%, ie the difference in costs. A crude measure of leverage.

To say I was surprised would be an understatement !

Now many platforms cap costs so the above is a bit crude … but I do hope you get the point about a seemingly tiny change to costs having a large measurable long term effect. In a similar way, yields, growth, risk will all impact in similar ways, but somehow we just ignore that as ‘part of the investment landscape’

I wonder why Vanguard has been so successful – could it be about costs compounded over time ?

So if I use one of my longer term income plans and take a basic fund size of £250k with a yield of 3.5%,  that equates to a net yield of 3.05% or 3.10%… or £125 a year IN MY POCKET…. on 0.05% difference in fees !

It is oh so easy to say ‘it is just a few quid’. But what if the platform cost difference was much bigger then what ? Just looking I can see that HL caps its fees, but its not massively clear what the capping applied to, but even assuming it was £200 (as they say), that is still £100 more than ii, and trading fees start at £11.95 as opposed to £7.99 with one free trade a month.

I don’t class myself as a trader and although I do plan to buy and sell over the next year, I just never considered the costs to be that significant …. well … providing the service was first class !

but if 0.05% fee difference can leverage so much difference in both income and fund value, then ‘Costs’ have now rather come into my focus !

Big lesson – forget the seduction of the slick platform. The impact of costs on long term investing is a critical factor in which platform you use and for what type of investments. Different platforms are more or less suited to some investment options.

 

 

Notes:  Usual caveats apply – Do your own research. This is all to illustrate that costs matter

 

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