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The cost of owning an index-tracking fund via Hargreaves Lansdown’s Vantage platform is going through the roof.

Vantage is the largest fund “supermarket” in the UK, designed for do-it-yourself investors looking for a convenient way to hold funds, shares, Individual Savings Accounts (ISAs) and self-invested pensions in one place.

Hargreaves highlights its platform’s key features as the safe custody of investments, easy dealing and account administration, and fund and share research.

Earlier this month the firm announced a new pricing model for its clients, prompted by incoming changes to the regulations for savings products.

From 6 April this year, the UK’s providers of fund platforms—such as Hargreaves Lansdown—will have to charge openly for the services they offer (with a two-year transition period for existing clients).

In the past, platform providers were paid by hidden rebates from the annual management charges levied by the managers of the funds they sold.

Fund managers paid these rebates to platforms as part of a lump sum that included commissions payable to the financial advisers promoting their funds. The platforms then passed part of the lump sum on to the advisers.

Understandably, this bundling of fund manager charges, platform fees and adviser commissions raised concerns that investors were receiving biased advice, paying too much for savings products and earning sub-optimal investment returns as a result.

Last year, the director of policy at the UK financial market regulator, the FCA, said that his agency’s platform reforms would ensure that customers know what they are paying and the levels of service that they can expect.

Whether clients holding low-cost index funds on Hargreaves’ Vantage platform could have expected what they will now encounter is another matter. That’s a gigantic increase in costs.

Currently Hargreaves charges between a monthly platform fee of between zero and £2 per month for a range of over 100 index funds.

From April 6 this is going up to an annual charge of 0.45% for the first £250,000 of fund investments held on the platform (there’s a sliding scale for larger holdings).

Below I’ve shown what effect this price change will have on investors using Hargreaves to hold their index funds, using two popular trackers as an example and assuming three different invested amounts: £10,000, £100,000 and £250,000.

£10,000 Fund Holding

Index Fund

Annual Fund Cost (%)

Annual Fund Cost (£)

Current Platform Cost (£)

Future Platform Cost (£)

Vanguard FTSE UK Equity

0.15

15

24

45

SWIP FTSE All Share

0.09

9

24

45

£100,000 Fund Holding

Index Fund

Annual Fund Cost (%)

Annual Fund Cost (£)

Current Platform Cost (£)

Future Platform Cost (£)

Vanguard FTSE UK Equity

0.15

150

24

450

SWIP FTSE All Share

0.09

90

24

450

£250,000 Fund Holding

Index Fund

Annual Fund Cost (%)

Annual Fund Cost (£)

Current Platform Cost (£)

Future Platform Cost (£)

Vanguard FTSE UK Equity

0.15

375

24

1125

SWIP FTSE All Share

0.09

225

24

1125

For a £10,000 index fund holding, the platform charge will nearly double from April 6. For a £250,000 holding, the platform charge will increase by a factor of nearly fifty. For any sizeable holding, the platform fees will also dwarf the fees being charged by the funds’ managers.

Hargreaves says that the new FCA rules mean it has to apply the same platform charge for all funds.

It says it’s removing the existing flat £1 or £2 per month platform fee currently levied on a number of index trackers, and applying the same “low-cost tiered tariff” across all its fund range.

“This means most investors with smaller passive holdings will be better off. Investors with larger passive holdings may pay more,” Hargreaves says in what is surely the understatement of the year.

Of course, it’s possible that the UK’s leading fund supermarket is simply trying to get rid of low-fee index fund business and to focus on higher-margin active funds. Active funds have traditionally charged about 1.3-1.5% a year and will now levy so-called “clean” fees of 0.65% to 0.75%, plus the new platform fee. For such funds, the platform fee is offset by the reduction in the headline fund charge.

A commercial objective of encouraging index fund investors to leave would be surprising, though, given the rapidly increasing market share of benchmark-tracking funds and the continuing outflows from more expensive and, in the main, poorly performing active products.

The FCA, which is tasked with ensuring competition as well as regulating the markets, now faces a dilemma. When it introduced its reforms to the UK retail investment product market in 2006, the regulator (in the guise of the FSA, the FCA’s forerunner) said it wanted to ensure better overall outcomes for savers.

The fee hikes just announced by fund platform providers hit hardest at those seeking to save at the lowest cost, suggesting the regulator’s objective is getting farther away, not nearer.

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