Customers of discount broker Hargreaves Lansdown will be forced to pay additional fees to invest in tracker funds from the start of 2012, resulting in additional costs for those with investments below £4,800.
The broker will begin charging a flat fee of £1 or £2 per holding per month from 1 January next year to hold traditionally low-cost index trackers, replacing the 0.5% annual fee that it currently charges.
Smaller investors take a hit
An investor with £1,000 in one of the tracker funds that will now charge £2 per month will see their annual charge increase to 2.4% of their investment, on top of the annual management charge built into the fund.
However, if an investor has £5,000 in one of the affected funds, the fee would be equivalent to 0.48% of their investment and therefore a reduction from what they currently pay. The break-even point, where an investor would still pay exactly 0.5%, in line with the existing annual fee would be £4,800 in a single tracker fund.
From January onwards, investors will pay £2 a month to invest in the Fidelity MoneyBuilder UK Index, for example, while HSBC’s suite of FTSE index trackers will also cost £2 per month. A total of 36 funds will be affected by the new flat fee.
Increasing passive costs
The fees are designed to cover platform administration costs, ensuring that the broker can generate some income from providing such a service.
Hargreaves Lansdown has stressed that it will continue to be ‘free’ to hold more than 2,400 of its funds through its Vantage Service with charges, where applicable, for shares, investment trusts, ETFs, gilts and bonds remaining unchanged.
There has been much debate around the relative value of active managers over the past few years, those that actively select specific stocks for the fund that you invest in, and passive ones, such as tracker funds that follow the performance of the stock market. Which? research carried in August 2011 found that 66% of active managers investing in the UK failed to beat the FTSE All Share over the past 10 years.
That said, tracker funds will always slightly underperform the index they track, owing to the fees they charge.
Active managers typically charge an annual management fee of 1.5%, split between the fund manager and the adviser and/or fund supermarket that you buy the fund through.
Tracker funds can often charge less than 0.3% per year, so around one fifth of what active managers charge, making them increasingly popular with individual investors.
Which? Money investment expert Matt Woodington said: ‘The new charge from Hargreaves Lansdown highlights the importance of shopping around for investments and not just going with the first provider that you see. Particularly if you are investing with a small amount to begin with, it is vital to ensure that you are paying as low a fee as possible to maximise your returns.’