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Don't mind me

Part 3: Rubbing shoulders with old money

One of the problems people have with Banks is hidden fees but when you start to understand how banks are set up you start to understand how there are so many ways for hiding fees.

I said banks were like big lego sets. I was going to describe them as jigsaw puzzles but they are more three dimensional than that because business lines have front, middle and back office functions.

When each part of the system is disaggregated there is almost an infinite number of fee structures – a source of much discontent amongst consumers.

When a player bundles different functions fees can be dropped in one area (e.g. dealing) and made up in another (e.g. management) to suit the marketing requirements.

The value chain is incredibly flexible which makes it (deliberately) complex to understand.

Let’s take a look at the relatively simple exercise of purchasing shares and explore the value chain.

I am going to use three examples of share dealing services that illustrate the flexibility of the system - how charges can be reduced in some areas and made up in others. 

Hargreaves Landsdowne: UK leading self-directed dealing platform.

RobinHood App: Pre-launch mobile native app marketed as zero commission trades “to democratise access to markets”.

Motif Investing: Buy and create baskets of stocks linked to investment themes but at the cost of purchasing a single stock.

Note: Motif and RobinHood, like Nutmeg, Wealthfront, Betterment and a hundred others are typical of what we are seeing in techville - startups owning the front-end interface that the customers see, but plugging into old school infrastructure for clearing and settlement. This is because they need to find market-fit before they build the back-end themselves. This is another reason they have to be well funded - those services don't come cheap.

Disclosure: I have absolutely nothing to do with any of these companies!

There are broadly 2 types of charges: Transactional (one-off) and Management (annual).
N.B. This is still an over-simplification

In a typical fund management business fees would be expressed as management and performance, but that may or may not include account set up, share registration, auditors, legal, custodian, FX, transaction and redemption.

Funds are required to express the Total Expense Ratio (TER) which is total costs divided by total assets expressed as a percentage, but even then in the UK there is no legal definition of what is required in the TER.
But there's more....
>   RobinHood charges $0 for a US trade, but $50 (very high) for an international trade – great example of a hidden fee.
>   HL reduces it’s cost the more often you trade. It also charges a spread on FX which is hidden from these costs and are scaled to the size of trade. It is a percentage of the trade so on big trades can be extremely high.
>   Motif looking like good value at this point.
  • This is where you see RobinHood and Motif starting to make their fees – hefty fees for withdrawing from their system.
I think all three are fantastic businesses (particularly Motif given the above), but the purpose of all this is to illustrate that in just these three examples there are
36 different possible points to charge the customer.
If you want to reduce a fee somewhere for marketing purposes (e.g. #ZeroCommission) you easily can – you just have to make it up elsewhere. It's called cross subsidisation.
Note: I have taken their fees from here: HargreavesRobinHoodMotif. None of which are particularly easy to find on their websites (yes, even startups don’t advertise their fees!). I may have got things wrong but I don’t care, I’ve tried my best and spent way more time trying to figure out what these guys are trying to charge me than your average customer would so if you’re from one of those companies and want to give me shit feel free to retort.
Part 1   :   Part 2    :   Part 3   :   Part 4   :   Part 5
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