How to invest £600,000? stay with HL?
|Financial Advice | General
Asked by craigos, submitted
08 June 2014.
I am a new investor with ~ £600,000 to invest
I have an account with Hargreaves Lansdown holding:
~75k in HL MM Income and Growth Managed fund
~45k in HSBC FTSE 250 Index tracker
I want to sprad the rest over the next few months across index trackers for the US, Europe, and emerging markets.
1. is HL a good place to be, considering their 0.45% platform fee (0.25% on £250k+) - if not where is better for me?
2. any advise on when I should be jumping in with the other index trackers and more specifically which ones may you suggest?
Answered by Justin on 10 June 2014
I think the three key considerations here are how much you pay in platform charges, how you invest the money and tax.
Let’s start with platform charges (i.e. the service that allows you to access lower cost ‘clean’ fund versions and mix and match from a variety of managers). Hargreaves Lansdown charges 0.45% a year on the first £250,000 and 0.25% on the next £750,000. So on £600,000 you will pay the firm around £2,000 a year. This is far too much for what is essentially an administration service. You could reduce this to a few hundred pounds or less using a fixed annual fee platform such as iWeb, Alliance Trust Savings or Interactive Investor. Take a look at my www.comparefundplatforms.com website for more details.
Moving on to investments, you should bear in mind both cost and spread of investment. Your existing HL multi manager Income & Growth fund is a ‘fund of funds’, that is HL invests in a range of other (mostly UK stock market) funds. While this provides diversity, it’s expensive. HL charges 0.75% to run the fund and the underlying funds (at the time of writing) cost a further 0.65% a year, so you are paying 1.40% in total. By contrast your HSBC FTSE 250 Index fund is cheap at 0.17% a year, but invests in a relatively narrow range of companies.
Before picking funds it makes sense to take a step back and consider how much risk you are comfortable taking and what you are trying to achieve.
At present you seem primarily focussed on stock market investing, which will hurt if/when markets take a heavy tumble in future. If you are happy investing for 10–20 years and content to ride through the ups and downs then nothing wrong with this approach, but it might make more sense to invest across a range of different investment (or ‘asset’) types that tend not to all move in the same direction at the same time. For example, you might consider corporate bonds, commercial property, commodities and absolute return investments. Each has its own characteristics and pros and cons, but can help bring far more balance to a portfolio.
Any income requirement you might have will also affect the types and combination of assets you choose. And within stock markets you should consider geographical, company size and sector exposures to ensure you don’t have too many eggs in one basket.
What makes a sensible mix of assets can vary widely from person to person, so I really would encourage you to give a lot more thought to this before choosing funds. You might find the investment section on this website a helpful starting point to learn more about the different asset types.
When you do come to choosing funds I’m from the school of thought that says use low cost trackers for exposure to core markets and good active managers to hedge your tracker exposure (i.e. use managers who invest quite differently to the Index), for more specialist exposure (e.g. smaller companies) and for assets that can’t practically be tracked (e.g. physical commercial property and absolute return).
The most cost effective tracker will partly depend on which platform you end up using, since availability and charges vary, but provided a fund has a good track record of accurately tracking the desired Index at low cost you won’t go far wrong. Again, choosing the indices to track, i.e. the big picture decision, is arguably more important.
Finally, I’m assuming this money is held outside of ISAs and pensions and you are UK tax resident, in which case tax is an important consideration.
Dividends are deemed to be paid net of basic rate tax, but you will have additional tax to pay if a higher or top rate taxpayer. And interest (e.g. from corporate bonds) will be subject to income tax.
More of a potential concern over time is capital gains tax. You can realise gains of up to £11,000 (in the 2014/15 tax year), but gains above this are taxed at 18% if in the basic rate tax band and 28% if higher or top rate. So, I would give some thought as to how you can structure the investments to try and avoid large potential tax bills in future. Sadly there is no magical solution, but using ISA allowances and potentially pensions will help over time. Offshore investment bonds also have their merits, but you need to be aware of the potential downsides and costs.
Hope this gives you some food for thought.