Lidl or Waitrose?

D2C

Lidl or Waitrose?

Austerity measures

January is usually an austere month. After the Christmas and New Year festivities, not only do we have far less money, but it’s also becoming the norm to give up alcohol for the entire month. Add to that our (mostly) unrealistic New Year resolutions to get fitter, get richer, and get better at a variety of things and January becomes a very tiresome month.

The focus on cost was particularly important in the direct-to-consumer (D2C) platform world. With the April deadline roaring down the tracks towards them, January was when most D2C platforms announced their pricing strategy. The industry had been waiting with bated breath for the largest direct platform (and also the largest overall distributor in the country), Hargreaves Lansdown, to announce its pricing strategy, which it finally did on 15th January. In a nutshell, Hargreaves Lansdown (HL) has introduced a flat fee of 0.45% regardless of the size of assets under administration.

Coincidence? Hardly.
A mere week later and Fidelity FundsNetwork pinned its colours to the mast with the announcement of a 0.35% fee on assets up to £250k (20bps on assets over that amount). Announcements have come thick and fast since then with Axa Self Investor, Barclays Stockbrokers, Halifax Share Dealing (Iweb) all declaring their hands in the last week or so. Bestinvest is the latest to report its new pricing structure (today) — its prices start at 40bps tiering down to 20bps for investments between £250k and £1m. It was no coincidence that HL was the litmus test for the D2C industry.  It came under fire for its charges and its competitors have adapted their strategies in light of the criticism.

I’m not going to thrash out comparison tables as they’ve been done elsewhere (the best is the Lang Cat’s).  In a nutshell, direct platform prices are coming down, but what is interesting is the obsessive focus on cost. Why? Because human beings are irrational and the cost is not the only factor we take into account. That’s why many of us shop at Waitrose and not Lidl. Or get our hair cut in trendy yet expensive Shoreditch hairdressers, instead of the perfectly capable barbers on our local high street.  Service counts.

In the advised world, it explains why the comparatively expensive Transact has such a loyal following among advisers — its service is fantastic. And that’s where HL comes into its own. It has always been heavily invested in service throughout its 30+ year history.  It got a lot of flak for its pricing particular around larger portfolios. But service is a great differentiator and investors will stay where they are if they’re happy with the overall service.

All the D2C platforms have negotiated new fees with fund managers, however, HL has had some particularly tough negotiations with fund managers. It has operated a Wealth 150 list for more than a decade and will now introduce a shorter list, the Wealth 150 Plus list of 27 funds, on which it has negotiated the keenest tariffs. So although it might be more expensive on the admin front, it’s likely to be considerably cheaper on the fund front, with the overall effect being that the total cost of ownership comes out cheaper. If we continue with the supermarket analogy, HL is using the Lidl strategy of hard discounting — offering far fewer funds at highly discounted prices. It is not unreasonable to expect that these 27 funds will account for 80% of HL flows. That’s a lot of concentration.

Take-aways

The other big take-away (horrible but apt term) is the fact that Fidelity is essentially telling us that its long-term future lies in two areas: direct and workplace savings. It’s an end-user machine through and through and some of its adviser clients may be feeling that they’ve been cast adrift. Adam Smith, Cofunds’s Commercial Director, confirmed that Fidelity’s stance has resulted in a jump in queries from Fidelity advisers and expects Cofunds to benefit hugely. But the significance of D2C hasn’t been lost on Cofunds either.  It is promoting its D2C service to its army of advisers to great effect. Some 300 clients have already signed up, and as Smith pointed out, it was one of the first in the platform market to provide such a service starting with Chelsea and Bestinvest.  The D2C battle rages on.

TGIF everyone (Friday and February).

Bella