Broker Hargreaves Lansdown sparks investment price war

The UK's biggest broker Hargreaves Lansdown has cut charges for its 500,000 savers, challenging rivals to follow

Peter Hargreaves and Stephen Lansdown (right) of Hargreaves Lansdown
Peter Hagreaves and Stephen Lansdown have both become billionaires after the company's profits and share price soared in recent years

The UK’s biggest fund supermarket has sparked the beginning of an Isa and pension price war after cutting charges for its 500,000-strong army of do-it yourself investors.

Not only are costs coming down, but they are being made more clear – with savers being able to see for the first time how much money Hargreaves Lansdown keeps, and how much goes to the fund manager, such as Jupiter or Invesco Perpetual.

Under the old pricing model, which is being outlawed by regulators, the average customer paid around 1.33pc a year in total charges with the breakdown not being spelt out. This total will drop to 1.1pc in March.

And of this 1.1pc, Hargreaves Lansdown will keep 0.45pc where the average investor is concerned. The remainder of the charge – 0.65pc – will be the average fee passed on to the fund manager.

The savings will be small at about £23 a year per £10,000 invested, but over time will mount. However, the broker has simultaneously implemented a number of new fees, including charging £20 for posting twice-yearly statements and £25 for closing an account. There will also be an additional charge for most customers who hold both investment trusts and shares.

The changes are expected to have wider significance in a market where Hargreaves has been dominant and where competition, until recently, has been limited.

The announcement comes at the start of what the industry calls "Isa season" - the run-up to April 5, the end of the tax year, when most investors buy funds in tax-free Isa wrappers. Selecting the right fund supermarket can have a significant affect on the cost to investors and therefore the returns they receive.

Ian Gorham, the head of Hargreaves Lansdown, said customers would save £8m a year.

“We are now reducing the cost of investing in funds, saving our clients an estimated £8m per annum. As a result, most clients will be paying even less when investing through Hargreaves Lansdown."

Here Telegraph Money runs through the numbers and explains how if you are a Hargreaves Lansdown customer you will be paying less in the future.

What was the old pricing model – and what has changed?

Hargreaves Lansdown, like other fund "supermarkets" or firms operating as investment middlemen, has been forced to make changes to its pricing model due to new rules.

Until now, these supermarkets made most of their money in the form of undisclosed commission from the fund managers whose products they promoted.

From April, supermarkets will not be allowed to receive behind-the-scenes payments from fund managers.

Under the old system a fund supermarket would typically charge investors around 1.5pc a year (£150 on a £10,000 Isa).

Of this £150, the supermarket keeps around half of the money or £75. The other half goes to the company that runs the fund, such as Invesco. Some supermarkets, including Hargreaves Lansdown, handed back some of this commission as a bonus, averaging 0.17pc for Hargreaves.

The average Hargreave customer therefore pays around 1.33pc a year, or £133 on every £10,000 invested.

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What are the new charges – and how do they compare?

Hargreaves has introduced an explicit, annual charge of 0.45pc a year for the majority of its customers – those who have investments worth less than £250,000. For those with more than £250,000 in total savings with Hargreaves, the fee drops to 0.25pc.

The 0.45pc annual charge is higher than some of its rivals, including Charles Stanley and Cavendish Online (both 0.25pc regardless of the sum invested). Alliance Trust Savings and Interactive Investor both remain far cheaper for those with big portfolios as they charge fixed annual fees and charges each time you buy and sell funds or shares. ATS, for example, charges £90 for holding your Isas and a £12.50 dealing fee.

Comparing Hagreaves to these players is difficult and depends on your circumstamces. Even comparing it to rivals who charge in the same way, by percentage, is difficult because Hargreaves, due to its size and buying power, has managed to negotiate specially reduced prices for hundred funds that are listed on its website.

The average annual management charge in Hargreaves Wealth 150 fund list, which comprises the most popular investment funds, will be reduced from 0.75pc to 0.65pc. Some 27 of these funds will be even cheaper – charging just 0.54pc.

This compares favourably to other fund supermarkets that price funds on average at 0.75pc a year.

In total a Hargreaves Lansdown client will now expect to pay 1.1pc a year in charges, to both the fund supermarket and the fund manager. This will net the average customer a saving of around £2.30 a year on every £1,000 investment.

The savings increase alongside the fund size. An £100,000 nest egg will be better off by £230 a year under the new prices.

Why were the rules changed?

The change to the way fund supermarkets make money has been brought in because regulators are concerned commission payments creates bias. It also hoped that greater clarity will reduce the cost.

Under the new regime fund supermarkets will charge customers directly. Investors will pay two charges – one will be the fee to the fund manager and the other will be the fund supermarket charge.

Some fund supermarkets will charge a flat fee for accounts or dealing while others will levy a percentage fee on your savings pot. Some will use a mix of both.

A number of fund shops have already moved to the new charging structure, including Alliance Trust Savings and Charles Stanley Direct.

Two major fund shops, Barclays Stockbrokers and Fidelity Personal Investor, are yet to announce their new charges. Many of the smaller fund shops, such as Bestinvest and Chelsea Financial Services, are also keeping their powder dry.

The Telegraph understands the firms that have not yet announced will unveil their new prices imminently, and it is expected that the overall costs for savers will be reduced.

Fidelity said it will announce its new fees next Wednesday and promised to be cheaper than Hargreaves for "the majority of investors".

Even on current prices, customers would save by switching to a rival offering new model such as Charles Stanley Direct or Alliance Trust Savings. Analysts said today's announcement will put pressure on rivals to reduce their fees even further, such is Hargreaves Lansdown's dominance of the fund shop market.

City traders reacted to Hargreaves' announcement by marking its share price down by about 4pc.

• This article, first published at 8.30am, has been updated throughout the day as further information emerges

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