And so, Vanguard has laid down the gauntlet. It’s not the first time the investment giant has made waves in the industry – it is widely credited with starting the race to the bottom on fees for tracker funds.
Now the firm has launched a self-invested personal pension (Sipp) account which charges just 0.15% a year – and is capped at £375. For comparison, Hargreaves Lansdown charges 0.45% for investors on their first £250,000 and AJ Bell 0.25%.
So this is particularly game-changing for any investors with large sums in their personal pension pot. Where someone with £1 million in their personal pension might pay £3,000 or more a year in charges to other fund supermarkets, they would pay just £375 a year to Vanguard.
But that’s assuming, of course, they’re willing to limit themselves to Vanguard’s own fund range. Many investors will not. There are plenty of excellent fund managers out there who will not be available through this new uber cheap pension and fans of, say, Terry Smith or Nick Train might prefer to pay more for a platform that offers funds from across the entire market so they can stick with their favourite managers.
For those who can content themselves with cheap tracker funds or ready-made portfolios such as Vanguard’s LifeStrategy range, though, this could save some serious dollar. That’s especially true when you consider how fees can eat into your returns over the long-term.
But here’s the real problem. Large swathes of investors won’t switch their fund platform even if it means saving hundreds or thousands of pounds a year. Why? Not because they are loyal to their favourite fund manager or because they really rate the customer service of their current provider, but because switching is, at the end of the day, a hassle. And I’m not sure that even the cheapest pension in the world can overcome that.
All Change
This week in the funds industry felt a bit like football transfer season; mergers and takeovers left, right and centre. Ok, there were only two, but it was still big news.
Jupiter is buying Merian just 18 months after Merian made itself independent from Old Mutual. Confused yet? And Franklin Templeton is buying Legg Mason, causing major concerns in Morningstar HQ about how long some of the fund names are getting and whether we can fit them in a headline. These follow on from last year’s mergers of Liontrust and Neptune, and of Premier and Miton, and I’m sure they won’t be the last.
So what’s driving all this corporate activity? At the heart of it, it’s costs. Fund groups are increasingly under pressure to lower fees because savvy investors (such as yourself, bravo you) are wising up to fees and because tracker funds have won billions in assets away from active managers. If fund groups join forces, they can pool their resources, combine their expertise and cut their costs.
So, while I have my concerns about just how long some of the names of these investment firms are getting, these developments do show that even the funds industry has to pay attention to popular demand sometimes.
Vive le revolution!
Behavioural Biases Galore
You may have spotted our new "How to Be a Better Investor" video series this week, where we're looking at some of the common pitfalls that investors fall into, known as behavioural biases. And don't worry, you can blame evolution for most of these, apparently.
First up, we're looking at the Hot Hand Fallacy (these things always have such catchy names!). This is where investors assume that because a fund manager is on a winning streak, he is more likely to beat his rivals in the future, even though there's no proof this is the case.
If you’re at all interested in how to become a better investor or just find behavioural economics fascinating like we do, then do keep your eyes out for more of these, because Dan Kemp has enough behavioural biases to keep us going for some time yet.
