Peter Hargreaves, co-founder of Hargreaves Lansdown, answers this week’s questions from Adam Lewis.
Q: How many healthy/profitable IFA firms are there at present? A:
A:There are a number of smaller IFA firms that are healthy. By small firms I mean those with 10-20 employees, which tend to be in speciality areas such as corporate pensions. Then there are the discount brokers such as Chelsea Financial Services and Bestinvest. They are good businesses.
Q: Are there too many firms? A:
A:One of the problems is that there are a number of IFAs who are at the low end of the market – that is, the mortgage/savings plans end. These firms cost as much to comply as those that write a lot of business.
Q: What are IFAs selling too much of? A:
A:Single-premium investment bonds. In many cases they are taxed more highly internally than the tax rate of the client. Clients are also being sold too many offshore bonds for inheritance tax purposes.
I also think they are being sold too much in property. It is madness – most people’s biggest asset is their house so why would they want to invest more in it. It is hardly diversification.
Q: What are they selling too little of? A:
A:Good, straightforward equity funds. The average IFA should be selling multi-manager. If you look at multi-manager sales, they are a minute proportion of the total business done.
Q: Why are several IFAs selling more property funds than equity funds? A:
A:Because huge numbers of them are incompetent. They are selling the client what the client wants to hear. If you went along to the average client and told them to put half their money in the building society and the other half in property they would probably kiss you because that is what they want to hear.
Q: How profitable is HL? A:
A:We have had uninterrupted profit growth for years and years and this is carrying on. We will make more profit this year than we did last year.
Q: Does the commission model of paying for advice still work? A:
A:I believe the way the industry should go is that every investment product should have an embedded service commission. So every single product should pay the holding broker, say, 0.5% per annum. There should be no initial commission at all. I believe that the brokers who carry out a lot of work in arranging a client’s affairs have the ability to charge a fee for that. So there should be no sales commission; there should only be a servicing commission.
Q: How much of your whole business is now fee-based? A:
A:Between 60% and 70% of our income is obtained from fees. We charge servicing fees, or we obtain them from the groups. Unit trusts carry a 0.5% embedded service charge, so the unit trust model is perfect for us. We earn fees on £7bn worth of assets under administration.
Q: You have said that you think only three fund supermarkets will survive, are you tempted to change this view? A:
A:It depends. If the life companies ever do get their act together with their own platforms, they have such wonderful distribution that I think it will put even more pressure on the platforms. In addition IT costs are escalating all the time – hardware, software and IT staff wages cost us approximately £4.5m a year.
Q: We are rapidly entering what in the past would be considered the Isa season. How useful is such a concept? A:
A:The whole industry’s best time is the five weeks leading up to April 5. This includes pensions as well. March and the first five days of April have always been the busiest and I think they always will be.
Q: Is it necessarily a good thing that all Isa money comes in at the same time and other months are quiet? A:
A:Because pensions also have an April 5 deadline, it would be useful if Isas had a different deadline. It would be good to stimulate savings because it would mean that people would look at their finances twice a year.
Q: Will 2007 be a good Isa season in your view? A:
A:If markets are still encouraging it will be a good Isa season. However, investor confidence is not that strong, so if something does happen in the markets it will knock their confidence. Therefore, it really does need a solid market, so investor confidence can be maintained, for it to be a good season.
Q: What do you make of the recent Isa simplification proposals? Was it worth getting rid of the Pep? A:
A:The only concern I have about the simplification of Isas is that it will be a retrograde step if people can hold all their Isas in cash.
This will not attract new savers at all. All it is doing is changing people’s deposits from being in a taxable environment into a tax-free environment.
So there has to be some split that says so much has to be held in equities. I actually thought it was a retrograde step when they allowed fixed interest to be held in Isas.
The daft thing at present is that interest on deposit in a mini-cash Isa is tax free, whereas dividends [in stocks and shares Isas] have to pay tax.
Right now we believe people should be investing in equities because that is long-term investment, but there is a disadvantage tax-wise to do so.
Q: What are the challenges for HL? A:
A:One of our challenges is to persuade the life companies to stop paying the crazy initial indemnity commission arrangements and move to a more equitable arrangement.
We would like to bring the life companies’ products into the same business model as for unit trusts – there is a distinct advantage in doing it. Renewal commission makes for sound businesses; indemnity commission makes for unsound businesses.
There are no signs of this changing because the biggest life company refuses to move, and while it refuses to do so none of the others dare move.
Q: What sort of life products would you like to use? A:
A:Corporate pensions definitely. Also term assurance. Why should term assurance pay indemnity commission? It is just mad. Then there are single-premium investment bonds. Why should clients pay a broker 6% or 7% upfront to sell it?
Q: Who would you describe as a typical HL client? A:
A:Over 50, middle class, homeowning, predominantly work in the private sector, or self-employed. We have clients with anything from £10,000 to millions of pounds.
Q: How many clients do you have now? A:
A:Half a million people have dealt with us, but we have 250,000 actively dealing.
Hargreaves Lansdown was formed in 1981 by Peter Hargreaves and Stephen Lansdown, and employs more than 600 people. Its main divisions include a fund supermarket, Britain’s largest annuity bureau, an execution-only stockbroker and an internet stockbroking service. There is also a corporate pensions division and an IFA operation. Hargreaves Lansdown is the leading provider of self-invested personal pensions in Britain.