Brokers' fees fly away

The PEP war takes a new twist as a leading investment adviser offers rebates on its commission. Paul Durman reports

DISCOUNT shops are set to go mainstream in the world of investment. One of Britain's largest sellers of PEPs, unit trusts and other investments is launching a full-blown discount service offering savings of pounds 180 or more for buyers of many pounds 6,000 PEPs.

The move is the biggest by far of any investment firm selling a range of PEPs from different City names. It comes on the eve of the PEP buying season, when a million or more people are expected to take up their annual tax-free allowance before the fiscal-year-end deadline. And it is a symptom of the growing price competition in the investment industry, intensified by the lure of billions of pounds of maturing tax-free Tessa money.

The discounting move is from Hargreaves Lansdown, a Bristol-based independent financial adviser, which is one of the leading sales channels for many PEP companies. It is renowned in the investment industry for having a mailing list of more than 300,000 potential investors and sells many thousands of PEPs a year.

The company will rebate much of the commission it currently earns for selling PEPs, unit trusts and other investments for buyers who are prepared to buy without advice. This will mean more of investors' money is put to work in the stock market and will allow them to make profits more quickly. Traditionally, PEPs have deducted 5 per cent of the money handed over for investment, 3 per cent of which has been commission, meaning that you start out making a loss. This move reduces that handicap.

Peter Hargreaves, the firm's managing director, said his company has been forced to give away its commissions by the challenge from existing discount investment brokers. These firms - which include Garrison Investment Analysis, Premier Investment and Chelsea Financial Services - allow investors to buy PEPs and other investment funds at a fraction of the usual cost.

Hargreaves Lansdown has committed itself to matching the deals on offer from the discounters, which can be as high as 5 per cent. Its new stance is being launched with an offer of commission-free buying of new PEP investments currently marketed by M&G, Schroder and Perpetual.

Sean Kingston, a Hargreaves Lansdown director, said: "We will not be beaten on the investment front. We will discount as far as we possibly can. We will match any deal."

The growth of discount broking is combining with other forms of price competition to produce generally lower-cost investment. Richard Branson's Virgin Direct, for example, pays no commission on the PEPs it runs and sells direct over the telephone to the public, saying that this allows it to pass on lower costs. (However, it has already been undercut this year by similar PEPs from Legal & General and Fidelity.)

Mr Hargreaves' move will make it easier to extract discounts from other advisers and may also encourage City PEP firms to offer discounts for investors who cut out the middlemen brokers and buy direct.

The City firms have been loath to do this because of fears of upsetting financial advisers, who, in many cases, account for the majority of their sales. Clive Boothman, managing director of Schroder Unit Trusts, believes it will become increasingly difficult to defend the existing system of investors paying a 3 per cent marketing commission if they approach a fund manager to buy directly.

But there are fears that discounting will lead to a general reduction in advice for consumers. The Consumers' Association warned last week that buying over the phone without financial advice could lead to inexperienced people taking out inappropriate investments. In spite of the prospect of lower charges from discount brokers, Roger Cornick, deputy chairman of Perpetual, believes investors could suffer. He said: "We would question whether a broker with reduced revenues will be able to service their clients as in the past. You can't give away all your revenue and provide a service."

And, with the evidence of his own company's strong-performing but high- charging PEPs, he said: "If the only thing that mattered to the consumer was price, nobody would be driving around in anything other than a Ford Fiesta."

However, Hargreaves Lansdown's move recognises the increased cost-consciousness of the 1990s. "Everything down to baked beans is extremely price-sensitive. The investor is aware that costs do actually make a difference to returns," Mr Kingston said. q Hargreaves Lansdown 0800 850661; Chelsea Financial Services 0171-351 6022; Premier Investment 01483 306090; Garrison Investment 0114-250 0720; The PEP Shop 0115-982 5105. Additional reporting by Steve Lodge