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Holly's Blog: No such thing as a free lunch

30 July, 2021

Fee-free trading app Robinhood (which challenged the idea of paying transaction fees and had a ‘Fight The Power’ vibe) had a bit of a limp debut on the stock exchange in New York yesterday, falling to under $35 after opening at $38.

The sheen fell from this once cool kid earlier in the year as the US regulator fined it $70 million for causing its customers “widespread and significant harm”. Ouch. Championing free trading, the company in part made its money by what is called ‘order flow’. A practice which is certainly pretty opaque and currently under the spotlight of the powers that be.

Market makers are like a second-hand clothes shop

Behind brokers and platforms are groups know as market makers. They want to trade as much as possible because they get a little cut every time they do. Every time we buy or sell a share, we get quoted a ‘bid’ price and a ‘sell’ price – the difference between the two is known as the ‘spread’ and is how market makers get paid.

To make this easier to grasp, it’s no different to a second-hand clothes shop which would give you £15 for a jacket and then sell it for £20. In this example, the spread is £5. The shop is the market maker and they pay someone like Robinhood to send them 1000s of people with jackets to flog! The question then comes as to whether Robinhood are sending you to the best shop?

Retail investors are often on the B-list for company’s weddings 

The company set out with a very public mission statement to democratise investing for all . . . but their idea of democracy is a bit odd. They have what is known as a ‘dual class share structure’. This is a bit like having an A-list for a wedding and they get the fancy smoked salmon and champagne reception. And the B-list who get a warm glass of wine and a sausage roll at 8pm, as Dad hits the dance floor when Boney M comes on. The shares sold to retail investors and institutions carry one vote, but the shares held by its co-founders carry 10 votes per share. This gives them 65% of the voting rights but hold less than 20% of the shares. That puts them more in the Idi Amin school of democracy in my books?

I like the idea of the company and they have certainly done a lot of positive things – challenging the status quo and accelerating change amongst the dinosaurs. Good for them (in part). Fee-free trading is an interesting development. But it does remind me about a really important rule I have when I think about money and investments. A rule which is particularly relevant when the ‘risk-free’ rate of return (that’s the interest rate) on money is 0.1% and financial scams are on the up.

There really is no such thing as a free lunch….

BUT putting all that to one side, there is such as thing as a cheaper lunch! Two tips.

One - check out our investment platform fee calculator – put in the details of your portfolio and see if you could be paying less somewhere else – and consider this alongside the service ratings. Many of you are happy to pay more for a provider which doesn’t make you sit on hold listening to Vivaldi.

Two – on funds. Every fund manager is now obliged to produce an annual Assessment of Value. Where they ask themselves the most fundamental of questions – are we delivering value for our investors? The process is evolving. In the first year, we were disappointed if not surprised to run the numbers and work out that 97% of all funds assessed were reported by the fund managers to deliver good value. Hmmmm. But, the regulator has growled very loudly and so I expect these reports to become more useful and slightly more critical of the dross.

Some are the most torturous of reads. Others cut to the chase with supporting info for those who want more. Baillie Gifford were the latest to publish their report today.

Here's a snapshot below just to show you one example. As an owner of a teeny fraction of the Positive Change fund I thought this summary did a pretty good job in telling me what I want to know? Although you sometimes have to search quite hard to find them, these documents will (should) be available for any UK fund you own. Just Google “FUND MANAGER Assessment of Value”. Worth a squizz if you want to compare any funds against a peer group average

Positive Change FundPositive Change Fund

We’re doing loads of work on this with asset managers, putting forward the consumer view and working to make these relevant. I would love to hear your thoughts.

Have you heard of these? Have you read any? What are the 4 or 5 things you would want to know to work out if value had been delivered or not? Whose is any good? And which ones have made you lose the will to live? Do ).

Over and out for the summer

My friends I am going to leave you at this stage and have a wee bit of a break over August. It’s been a fairly brutal 18 months, hasn’t it!? I am going to lie down in a dark room and maybe even on a beach somewhere for a bit. With a large sign saying DANGER DO NOT APPROACH over my head. UNLESS YOU ARE CUTE AND HOLDING A CHILLED VINO.

Thanks as always for your interest and support. We have a little bit of news to share with you later in August and after that – we’ll be back to school in September. (Please God it is quite literally back to school or I really will have a meltdown . . .)