In the 1990s all that lay in the future. Investment trusts date back to the 19th century, and on the face of it do much the same job as unit trusts. That is to say, they invest in a broadly diversified portfolio of stocks and shares. Unlike unit trusts, however, which simply issue new units when new investors come along, investment trusts are known as closed-end funds. That means that they cannot grow by expanding their investor base in response to any new investor demand. The number of shares they have in issue is fixed, so the only way that an investment trust can normally get bigger is through its investments increasing in value. If new buyers for the trust come along, there is no way to accommodate them unless they can find another shareholder from whom to buy their shares.

One consequence of this ebb and flow of supply and demand is that the share price of an investment trust does not always move in line with the value of its underlying assets. Whereas the price of a unit trust is designed to reflect the daily value of its assets, the same is not the case with an investment trust. If a trust is out of favour, the share price can easily fall to a level where it stands at a significant discount to the net asset value. At other times, the shares may trade at a premium. All this makes the share price of an investment trust more volatile than that of a unit trust. This can work both for and against the interest of the investor. In the best case, the investor benefits in two ways. First, the underlying investments appreciate in value and, secondly, the discount at which the shares are trading narrows. This produces a “double whammy” effect and a bigger positive return. In the worst case, the double whammy works in reverse. The investments that the trust has made do badly – and the share price falls even further as a result of the discount widening. Investment trusts therefore require more effort and care to understand properly.

The interest in investment trusts that developed in the 1990s was remarkable by the standards of the past. Far from trading at a discount, as they had done historically, many trusts became for a while so popular that they started to trade at a premium. Whilst investment trusts had gone down during the stock market crash of 1987, just as unit trusts had done, they had one great advantage as far as we were concerned. This was that because so few investors had owned them before, few of our clients had experienced losses with them. As a result they had no legacy of bad feelings about them. Until we came along, nobody had made much of an effort to market investment trusts professionally. The boards of many investment trusts were dozy and complacent, reflecting the fact that the money their shareholders had invested was essentially captive money. In other words, although investors could sell their shares to someone else if they did not like what a trust was doing, they could not ask for their money back directly from the trust itself. This is something you can always do with a unit trust. As a result the boards of investment trusts tended not to see themselves as being at risk. They had little incentive to do a good job.

Admittedly, that had started to change with a landmark event in the history of the investment trust business, when the National Coal Board Pension Fund made a takeover bid for one of the largest investment trusts of the day. The Globe Investment Trust, as it was called, was a particularly sleepy fund that in my opinion had no right to be in existence. Aside from its stock exchange investments, it owned a number of other businesses including Tyndall Unit Trusts, which was based less than a mile from our offices in Bristol. None of these other holdings were great businesses. Unsurprisingly, therefore, the shares in Globe Investment Trust stood at a huge discount to the underlying assets. The performance of the fund had been so pedestrian that no one wanted the shares. The National Coal Board pension fund found that almost everyone who owned shares in Globe was happy to sell. Their takeover of the trust turned out to be a peach of a deal. Once they had taken control of the company, the new owners of Globe were able to sack the board, realise all the assets and make a profit equivalent to the difference between the low market value of the shares and the trust's net asset value – a figure that ran into many millions of pounds. The takeover of Globe had the further beneficial effect of putting the whole investment trust industry on notice that poor performance would no longer be tolerated.

One consequence was that the surviving investment trust companies rallied round to form a trade association and appoint an official to promote the investment trust concept. By good fortune the person whom they chose as the first Director of the Association of Investment Trust Companies, Philip Chappell, was one of the smartest people in the industry. He was ably assisted by a young lady, Lesley Renvoize, who had marketing and sales skills and (I thought) more drive than most of the rest of the investment trust industry put together. Between them, Philip and Lesley set about trying to persuade the investment community that investment trusts were the way that private clients should obtain their equity market exposure. They were able to point to lots of good reasons, including the fact that investment trusts generally had lower charges than unit trusts, and had independent boards who looked after investors’ interests (in practice this advantage was a bit of a joke) and could borrow to increase returns.

We had meanwhile taken on a former fund manager from Tyndall, the unit trust business which had been owned by Globe before its takeover. He was an enthusiast for investment trusts and together we set about producing an investment trust management service, providing portfolios for clients who wanted to invest in these shares. This business did well partly because our fund manager picked some good investment trusts but also because the growing interest in investment trusts had the effect of closing the discounts between the share price and net asset value. The sector was going though one of those positive periods when investors were able to enjoy the double whammy effect of rising asset values and narrowing discounts. Our growing involvement in the business brought us into contact with the AITC. Although we were chalk and cheese in terms of our backgrounds, I got on well with Philip Chappell from the word go. He might have been what my father would have described as “old money”, but he was both a gentleman and exceedingly able. When I criticised the investment trust industry for its sleepy boards, amateurish fund management and superior attitude. Philip showed an interest in my comments and took them on board.

Michael Scott, our investment director at the time, wanted us to develop a bigger investment trust business. Events in 1990 were to prove how right he was. When Touche Remnant launched a new European trust in September 1990, he persuaded me that we should send details to all the people on our list who had expressed an interest in investment trusts. This was something we had never done before. Our list numbered just 1092 people. Although we were preaching to the converted, the response to our investment trust mailing was overwhelming. In a moment of madness, I worked out how much business we would have done in that one investment trust had we been able to obtain the same conversion rate across our entire mailing list, rather than the 1092 who did receive it. The answer was that it would have been the most successful investment promotion we had ever carried out.

When I rang Philip to let him know how well the launch had gone, he was sufficiently impressed to invite me to address AITC members at their annual conference which was being held in the Selfridge Hotel in London. My presentation generated a lot of laughter, not all of it intentional. One reason was that the lectern for the speakers was on a dais with a very small amount of space on which to stand. When I make a presentation I like to pace up and down, and I must have stepped off the back of the dais and disappeared at least three times during my presentation, much to the amusement of the audience. My talk was devoted to explaining how investment trusts could be brought to the attention of the general public and how well they would be received if only they were marketed in a more professional way. My message was received with little enthusiasm. Mike Scott, our investment director, was incognito in the audience and reported back how he had heard one delegate after another reacting with horror to the idea of having to go out and market their beloved product. The evening culminated in my suggesting that investment trusts would never become a mainstream investment sector unless AITC members changed their antiquated attitudes.

Never having shirked from ruffling a few feathers wherever possible I like to do something dramatic in my presentations. On this occasion I showed them the figures for the response to our promotion of the TR European fund and explained how much more business I might have done if only we had been able to send out a prospectus. I then took out the prospectus from a recent investment trust launch, which must have weighed about 4lbs, and dropped it from a height right onto the desk of one of the luminaries sitting at the front – anything to grab the audience’s attention! With a flourish I said, “To mail that would cost me thousands of pounds – yet you guys wouldn’t even pay the cost of printing them.” One of the fuddy-duddies in the audience played straight into my hands by piping up to say, “It’s the law that stops us.” It was exactly the reaction I wanted. I was able to take out a two page spread from the Financial Times and slowly unfold a prospectus for an investment trust complete with application form. This had been issued by one of the investment trust companies that were represented that evening. I argued that if an investment trust could legally stick a shortened prospectus like that in a newspaper for anyone to read, it must surely be legal for us to send something similar to clients who had already expressed an interest in owning an investment trust.

I thought I had won my argument but it seemed that nobody, with the possible exception of Keith Crowley, the then marketing director at Britannia, had grasped the implications of what I had said. Mike Scott and I departed depressed because we thought that the investment trust industry was too dozy and cosy to understand that we were offering them the greatest opportunity in their history. A couple of months later, however, I had a tip off that M&G, the company that had invented the unit trust in the 1930s, was thinking of launching an investment trust. I immediately rang Paddy Linaker, M&G’s chief executive, and got through to him in his car. I explained my ideas and said, “Before you go any further, may I please see the team that are launching this investment trust?” My enthusiasm must have struck a chord because two people from M&G were in my office at 9 am the following morning.

M&G produced for me exactly what I had unfurled in the Selfridges Hotel a few months earlier. It was a reprint of the prospectus that they were placing in a national newspaper folded down to A4 size. We folded it once more then added our covering notes and a PEP application form, because we felt that many people who bought investment trust shares would want to put them in a PEP. Until that point, investment trusts had only ever been sold to the general public by stockbrokers. They rarely bought unit trusts for their clients because unit trusts were not something that could be bought and sold on a stock exchange. Investment trusts, however, traded exactly like shares so there had never been anything to stop them. The M&G deal was a great success and marked the moment, in my view, when the investment trust industry finally woke up to the bonanza which it was to enjoy in the next few years with our help. The spate of new investment trust launches that followed was instrumental in bringing the private client back to investment after the setback caused by the crash of 1987.

However this was not quite the end of the story. Just as any gravy train is boarded by everyone, you can guarantee that with every bonanza someone will get carried away and cause a crash. After the M&G launch, it seemed that every single unit trust group had decided to launch an investment trust. I personally persuaded Martyn Arbib at Perpetual to launch one, despite protests from both his marketing director and finance director. It proved to be a huge success for Perpetual. By 1996 the amount of money that was being taken by investment trusts made everyone sit up and take notice. It was not all plain sailing, however, as we discovered when the wave of new investment trusts hitting the market started to become more and more complex. One of the advantages that investment trusts enjoy over unit trusts is that they can offer investors several different classes of share, each with different risk-return characteristics. One class of share, for example, may be structured so that it goes up more quickly than the market in which the trust is invested. By the same token, this class of share will go down more quickly when the market is falling.

It quickly became fashionable in the City to combine several different classes of share in any new investment trust launch. Roger Adams at Warburgs was an expert at making his investment trusts horribly complicated. One of the funds he created for M&G had income shares, capital shares and a zero-dividend preference share, a nightmare combination for those of us trying to sell the deal to clients. We managed to cut through some of the complication by packaging the income shares and the capital shares together to create a geared income share and selling the zero separately. As the zeros were the most popular share class, we decided to offer a discount on the geared income share. The actuary who was working for us at the time, a character called Bimal Balassingham, did all the calculations and smugly expressed satisfaction with his work. We sent out our mailing, only to discover that the discount he had calculated was so great that it was impossible for us to make a profit on the geared package! The news got out and I remember Diana Wright from the Sunday Times writing an article with the heading “Oops”. It worked out not too badly in the end because we sold so many geared income shares that we also had the lion’s share of the market for zeros. However Roger wasn’t content and went on to create an even more complicated trust called ISIS while Schroders created an offering so complicated that I would rather not go into it for fear of boring you.

Kleinwort’s investment trust, known as KEPIT, involved partly-paid shares and a second call some months after the first, an idea that had also been used in some of the UK privatisations. This gave the fund manager the chance to invest the first tranche of money quickly with the promise of more money to invest later when the second call was made. The Kleinwort fund's drawback was that because of this partly-paid structure the trust could not be invested in a PEP. The PEP rules prevented partly paid share issues qualifying for tax relief. Nevertheless Kleinwort got their trust to the starting block first and had a huge success, much to the discomfort of Mercury, which dillied and dallied over whether or not to proceed with their own issue. I remember a conference call in which I urged them in no uncertain terms not to cancel the issue. They took some convincing but in the end they went ahead.

Their trust took in around £500 million and I shudder to think quite how much income it produced for Mercury. The way in which Kleinwort handled their launch, which was massively oversubscribed, left us deeply aggrieved. We put a huge amount of work into it and spent a considerable amount on marketing, more in fact than anyone else. Yet in typical City grandee style, when it came to allocating shares, Kleinwort gave their private client stockbroker mates in London preference over provincial brokers such as us. We had to send hundreds of cheques back, incurring both the extra cost of returning the money and the wrath of investors who had been unsuccessful with their applications.

As so often, however, this turned out not to be such a disaster in the end. After these two big issues, which dwarfed in size the average investment trust share issue, many stockbrokers dumped the stock after it went to a premium and before long the Kleinwort trust was trading at a significant discount to net asset value. Investors also started to dump stock in the Mercury fund and that, too, went to a big discount. The subsequent investment performance of both trusts was poor. The Kleinwort trust was eventually wound up while the Mercury trust went through several transformations until, in 2004, a third of investors moved to a new trust and the remainder cashed in their investment.

Having got our ducks in a row, we applied to The Stock Exchange for membership. There were two ways to join. One would make us eligible to deal in shares while the other would make us full members. There was a difference of about a thousand pounds in the price of the two deals. Without consulting me, for which I am eternally grateful, Stephen chose the more expensive option. As members of the Stock Exchange, we added another leg to our business and, just as importantly, learned a huge amount from observing the way in which stockbrokers went about their business. For example, while we had always tried to be efficient, we had never thought it was the be-all and end-all to get contract notes out on a daily basis. In contrast, David Lambert was adamant that every contract note had to go out the same day, even if people had to work until 8 o’clock to get the job done (and when we got busy that sometimes did happen). David and his colleague also insisted on calling all their clients “Sir” and “Madam”, something which our stockbroking dealing desk does to this day. I strongly believe that in business you should never call anyone by their first name, especially if they are your client, until you are invited to do so. Many clients write to me and use my Christian name, which I am quite happy about but when I write back I always use their surname. Whilst all my staff call me Peter, I hate it if someone rings me up to try to sell me something and feels they can call me Peter. I do not believe it is professional. My staff are all instructed to call everybody “Mr”, “Mrs”, “Miss” and if they don’t know their marital status “Sir” or “Madam”. I believe our clients appreciate the courtesy we extend them in this way. Over the years, our stockbroking business has never stopped growing and we are now the eighth biggest execution-only stockbroker in the country.

There are always great humorous stories in any company’s history and the poor performance of commodities led to a story that has made me laugh for many years. In the early 1980s Save & Prosper launched a fund known as their Exploration Fund. This was a fund that invested in companies which prospected for minerals, oil etc. Because it was a time when there was not a massive demand for many of these products, the fund was doomed. Things are very different today. Indeed I suspect the fund would have been extremely successful had it still existed during the 2004-2008 period as China and India scrambled for raw materials. From the moment it launched, however it went down and it continued to go down from then on. I had completely forgotten about it until one day when I happened for some reason to value it for a client and noticed the price was 50p. In those days, many funds launched at 50p and I excitedly said to Stephen, “Look, Steve, the Exploration Fund is back to 50p.” He looked at me and said, “Pete, it launched at a pound!”

A few years later, Save & Prosper launched a pension product which they called their Retirement Account. It was for its time an innovative product in that whilst it had a managed option it also allowed investors to invest in any of their funds. I went to a grand presentation in Bristol and sat in the front row with a character called Stephen White. Save & Prosper’s top man, John Manser, who eventually went on to be a Fleming main board director, was there. John had launched the Retirement Account for Save & Prosper. He ended his presentation by saying, “And you can link it to any Save & Prosper unit trust.” Stephen White next to me chirped up and said, “You can’t link it to the Exploration Fund.” This caused huge consternation on the platform. They had discussions between each other wondering if Stephen knew something that they didn’t. After much discussion, one of the Save & Prosper team spoke up and said they were pretty sure it could be linked, but that they would look into it. They again asked Stephen if he was sure of his ground. Stephen White with a big grin on his face said, “You can’t if someone actually wants a pension at the end of the day.” It brought the house down, although Mr Manser was not amused.

During those 15 years, there was one constant thorn in my side. This guy, Mark Dampier, who worked for Whitechurch Securities, another Bristol firm, had done absolutely nothing as far as I could tell in respect of ideas for the press but was still being quoted in the same article as me! On some occasions, it even looked as though the ideas were his rather than mine. The last straw came when we worked on an M&G investment trust and spent a huge amount of money promoting it. Unbeknownst to me, Mark managed to persuade a journalist in the Daily Telegraph to write an article about the trust, mentioning that his firm, Whitechurch Securities, was offering a discount. As a result, they took an enormous amount of the business that I thought should have been ours.

My investment team often went to the same seminars as Mark and were friendly with him. Alan Durrant, who was our investment director at the time, was a keen fisherman, as was Mark, and they became good friends. Alan once pulled on an England shirt for fishing when he was younger and the two of them can claim to have persuaded the investment groups to invent the idea of a corporate fishing day. The groups were delighted to back the idea as, with Alan’s position at Hargreaves Lansdown and Mark’s constant presence in the press, they were a great source of influence in the unit trust arena. Mark had left Whitechurch and set up in business with someone else. It was a period when times were difficult in the investment world and the business was probably not capable of supporting both Mark and his partner. It’s the same in any business – if everything is going well, the relationship between the proprietors is always excellent, but when times are bad they can quickly deteriorate. Things had got to a low level with Mark and his business partner and Alan indicated that Mark might be interested in joining us. (Stephen and I have always been lucky in that things have never got so bad that it has threatened our relationship. We have always had an understanding that we would never do anything if one of us didn’t want to do it. It’s a great formula for success.)

Hiring Mark looked like it could be a good move for us. We had always felt that the press had question marks about our firm, partly because they knew we were a lot more successful than most others in the industry. Journalists are naturally suspicious and some may have wondered whether we really were as good or as strong as we made ourselves out to be. But journalists really trusted Mark. He had courted them more than I had and impressed them as being knowledgeable, honest and straightforward. Although he worked locally, I had never met Mark, partly because I had stopped going to all the seminars and jollies that the investment companies organised, believing that my place was in the office. Mark came in for an interview and we got on immediately. There is an old expression “once bitten, twice shy”, and Mark had been bitten twice. He felt that he should have had an equity stake in Whitechurch and left when it became clear that he was never going to be given one. In his second business, he was the minority shareholder and worried that he could be outvoted. Negotiations were a little tortuous because it was a big decision for him but eventually we came to an agreement and he joined us.

By chance, the desk near mine that Theresa had used until then had just become vacant. She had decided to move nearer the help desk where she could hear directly what was going on with clients (surely it cannot have been anything to do with moving further away from me!). At the time, we had two investment directors and I suggested that they toss a coin for Theresa’s desk. They decided that, as Mark was older than either of them (or so they said), he should have the space. That meant Mark was within shouting distance of me from day one and, in fact, ever since he joined he has always sat within a few yards of me. He is one of the few senior people in the firm whose internal extension number I still don’t know. I have never needed it. I am sure he will agree that my reputation in the industry is considerably different from the reputation I have with employees and clients. People outside the firm regard me as some sort of wild man, as I am outspoken and often fighting battles with the life companies and other providers. In the office, I can assure you that I am a pussycat.

Within two days, it was as if Mark had always worked for us. I don’t think anyone has come into Hargreaves Lansdown at such a senior position and settled in so quickly. Mark enjoys the banter in the office and the leg pulling (his is pulled more than most). I think the journalists were startled to see Mark Dampier, the man whom they trusted and admired, joining a company that had the reputation of being aggressive and outspoken street fighters. For a while the only thing they wanted to know was; “What are Peter Hargreaves and his firm really like?” It wasn’t long before, thanks to Mark’s efforts, it was Hargreaves Lansdown that was being quoted all over the newspapers. I think I can safely say that we have rarely had a bad piece of press since he summoned up his courage and opted to join us.

Since Mark arrived, we have recruited or promoted from within a complete PR team of our own. Some weeks Tom McPhail is quoted more on pensions than Mark is on investment. The rivalry between the two of them is not only good for the business but great fun too. In addition, we have some young investment researchers coming through who one day may be household names as far as investment is concerned. Ben Yearsley has already found a niche with Venture Capital Trusts and also acted as our liaison person for the flotation of the business. We were also extremely lucky in finding Richard Hunter who is frequently quoted in the newspapers and regularly appears on television. As he works in London, it is easier for him to appear in the live media arena.

There is no secret about why Mark is so good at his job. He loves the whole investment arena and eats, sleeps and breathes investment. He loves talking to fund managers. When he is not in the office, he is reading every bit of investment literature that he can find. His second love is PR itself. He loves going to London to meet and talk to journalists (a job which some people would dread). Even after 25 years in the industry, he still can’t wait to pick up the newspapers and see himself quoted here, there and everywhere. Mark is always available for a comment whether in the office or down the gym. He has even been known to be quoted from a ski lift in the Alps. The only time he tends not to get reported is when he is fishing, and that is only because some of the places where he fishes don’t have mobile service. If it was physically possible, I am quite sure he would happily talk to a journalist while reeling in a 6lb trout.

Apart from his family, the other two loves in Mark’s life are skiing and fishing, both of which are a mystery to me. I have never had the patience for fishing and suspect the only fishing I’d enjoy would be with a harpoon gun. As for skiing, I can’t understand why people who live in Northern Europe want to go to an even colder place in the winter and wear boots that are uncomfortable and stagger around with planks on their feet. The fact that we are so different is probably why Mark and I get on so well. We go down to the gym together two or three lunchtimes a week. There, we can discuss investment ideas and the business whilst feeling we are doing some good for ourselves rather than sitting across a lunch table, eating and drinking too much.

Meanwhile, I remember having lunch with someone from Schroders, which was regarded at that time as number one for performance and sales, and asking him which of his competitors were doing well. I was surprised to hear that it was Perpetual. Despite having been one of Perpetual's earliest supporters, and always enjoying a great relationship with them, we had fallen out with them over one particular matter. One of their funds had been an extremely poor performer and when Perpetual did nothing to change the fund manager, we eventually advised our clients to switch to another group’s fund which was performing much better. Whilst we felt we were right it did strain relations.

Although we later patched things up, the fact was that Perpetual were selling huge numbers of PEPs each year and, because we had lost contact with them, we had not realised how quickly they were growing. We therefore found ourselves in a difficult situation where we had lost our market share in PEPs, had allowed Chase de Vere to steal a march on us and were having problems in our relationship with one of the UK’s leading PEP providers. Perhaps we were distracted by our new stockbroking business. Perhaps the popularity of investment trusts had caused us to take our eye off the ball. Either way, we were suddenly paying the price for neglecting our core business which was and always has been unit trusts. PEPs in their new form were clearly the future of the business and it was clear that we would have to redouble our efforts if we were to restore our position in the market place.

There was another development that contributed to the start of the period of intense competition that turned into the PEP Wars. A firm in London called Chelsea Financial Services started to advertise in the paper that they would discount the initial commission on both PEPs and unit trusts. In those days, the standard rate of commission was 3% but Chelsea announced that they were happy to take just 2%. Chelsea Financial Services ran a slick operation. Nobody could blame them for spotting a gap in the market. Although they thought otherwise, I never felt any personal animosity towards Chelsea – but I didn't like what they were doing and lost no time in saying so. My point was that they were doing nothing to grow the market. All they were doing by discounting was changing where and how existing business was transacted. When Barings tried to take away their agency, Chelsea won their case without even going to court. That opened the floodgates for a sudden and dramatic proliferation of discount brokers in the PEP and unit trust industry. Eventually the 1% discounts became 2%.

Overnight, business became very tough. It did not take me long to decide that eventually we would have no choice but to join the discounters ourselves. Convincing the board was another matter. We knew for a fact that some of the discount firms were telling their clients to put themselves on our mailing list in order to get our information and ideas and then do their deals through the discount brokerages rather than through us. Eventually, a firm in Nottingham called The PEP Shop went the whole hog and discounted the full 3% commission. They could do this because there was now another way in which to get paid for recommending PEPs. A few years earlier Fidelity had begun to offer what was called renewal commission on PEPs, although we think it is more accurately described as a share of the annual management charge. Their deal was that every PEP an adviser sold would qualify to earn renewal commission of 0.5% every year, to be taken from the provider's 1.5% annual management charge. Haydn Green, who ran The PEP Shop, had worked out that a regular income from renewal commission of 0.5% a year was potentially far more valuable than the standard 3% initial commission the industry had lived off for so many years. Because it repeated every year, renewal commission made his business worth something in a way that one-off sales commissions could never do. Above a half-page advertisement in the Sunday newspaper for a Perpetual, Schroders, Morgan Grenfell or M&G fund, you could soon see Haydn's little adverts promising a 3% discount to anyone who saw the advert and dealt through him.

There was a way in which the industry could have responded to the new breed of discounters. Sadly nobody would act on my suggestions for dealing with the problem. Whilst it would clearly have been restraint of trade to take agencies away from the discounting firms, I felt that the industry could have opted to reward agents on the basis of effort rather than sales. If the discount brokers didn’t need the initial commission to do business, why – I argued – should they be allowed to use it as a marketing tool? None of the unit trust groups were brave enough to try my suggestion of removing initial commission from the discounters which is why I came to the conclusion that if we could not beat the discount brokers, we would have to join them. It also aligned our future even more closely with our clients. For 12 months, I argued to the board that we should take the plunge and switch our business model to one based on renewal commission. To get anywhere in business, however, you have to take people with you. Initially, only Theresa Barry was on my side. Admittedly, it was a very big decision to give up the 3% commission on which we had always relied to fund our business. A change would mean a serious hit to our annual profit.

I was becoming more and more concerned, however, that investors were using our marketing for ideas, only to place their deals with the discount brokers instead. The feedback from our focus groups showed how well the discounters were doing whenever we sent out a mailing. By this time the discounters had also started to do their own marketing. And, even though their mailings were not very effective, they were nevertheless doing more business than us. The discounting revolution was turning out to be a big threat. The facts and figures were staring us in the face, but the problem was that we didn’t dare to believe them. Whereas a few years before it had not been unusual for us to take as much as 20% of the money flowing into a new launch, that figure had now dwindled to just 5%.

As we couldn’t see a huge increase in the marketing efforts of our competitors, we therefore had to assume that people were getting our literature, taking our suggestions on board but placing their business elsewhere, merely to save a few pounds. Our help desk told us that they were constantly being asked to match the deal that the discount brokers were offering. It was impossible to quantify how many of our clients were being “promiscuous” in this way. The problem was that in an ordinary unit trust launch we had no way of finding out which people on our lists were buying from other people. The names of the unit holders are not public information. Then suddenly an opportunity came along to establish what was really happening. This came with the launch of an investment trust where we knew we were the only firm that had mailed details to our clients. For the first time we knew for certain that the marketing was 100% ours. It was easy for other brokers to execute deals in the investment trust because our “clients” could simply forward their application forms to them. All the broker had to do was Tippex out our name and put his or her own stamp on it. That was the only work they did, other than post the form to the investment trust group. Once the trust had floated, it was easy for us to obtain the list of shareholders and compare the names with those on our list. When we did that, it quickly confirmed the figures we suspected. 20% of the people to whom we had sent the forms showed up on the shareholder register, but only 5% had processed their application forms through us. The other 15% had gone through discount brokers. The discounters had collected the commissions and shared them with the clients.

Armed with this clear evidence of what was happening, it was obvious what we had to do. The Hargreaves Lansdown board decided to go the whole hog and throw out our existing business model in favour of a deep discount policy. This turned out to be one of the best business decisions we have made, although it cost us heavily in the short-term. At the time we were doing £45 to £50 million of PEPs business a year, which was worth £1.5 million in commission at the traditional rate of 3%. By discounting the entire 3% to clients, it meant we were reducing our profit by £1.5 million. We also knew that it would take 12 months for the full impact of renewal commission to come through. While some providers paid renewal commission on a monthly basis, many paid renewal commission only twice a year. We were fortunate that we had always been frugal, kept plenty of cash in reserve and had no silly overheads such as equipment leasing obligations. (Our policy has always been to buy rather than lease things we need.) While the new discount regime affected our profits that first year, the phenomenal response to the change brought home to us how much business we had been missing out on. Within 18 months, we had moved from doing £45 to £50 million a year in PEPs to a phenomenal £450 million a year, or ten times as much business.

However, the battle for leadership in the PEPs business was still not over. Willis Owen, another innovative firm in the Midlands, had plagiarised a guide produced by another broker. This was a guide to PEPs which they paid to be enclosed in the national newspapers. When the guide fell out of the paper, people had naturally thought it was something produced by the newspaper and endorsed by them (the vast majority of people trust newspapers). I cannot remember now who produced the original guide, though I do recall that it had traffic lights on the front. It wasn’t the greatest of marketing documents but it gave John Owen of Willis Owen an idea, which he was to exploit to the full. He visited all the leading investment companies and sold them the idea that they should contribute to the cost of his newspaper PEP guide. His version was much more professional than the previous attempt and the companies were more than happy to support him.

The guides were a clever idea and produced more business than anything that had gone before. Although John was paying for his guides to be inserted in the newspaper, he had also agreed with the newspapers that he could use the newspapers’ names in the title of the publications – The World on Sunday PEP Guide, The Daily Gleaner PEP Guide and so on. His own identity was to be found in the small print of the application form. From memory I think that one guide went to the extreme of asking for cheques to be made out to an entity that included the newspaper’s name. Faced with an invitation to subscribe to say The Sunday Post Offer, investors naturally thought that they were investing through the newspapers. The following year, from a standing start John Owen managed to do more unit trust PEP business in 12 months than we did, even with our many years of experience. It was as plain as a pikestaff that we had a real fight on our hands.

As discounting spread across the industry, the original discounters suddenly found that they were not doing the business they had done in the past. We had meanwhile been working hard to persuade the investment companies that those of us who did the most work in generating new business should also get the best discounts. As a result we were able to start offering even better discounts on initial commission. If 3% sounded good, why not 4%? As the pure discounters were doing nothing to create new business, they were no longer getting the best deals so they took it on themselves to discount future renewal commission as well. At first they discounted a full year’s renewal commission and subsequently they went up to 1%, equivalent to two years commission. It was a dangerous tactic because, if the market had gone down, it would have taken them at least three years to recoup the money they had invested to compete in the market.

Even this however was not the final act in the drama. That came when a firm called CommShare started advertising that they would surrender some of their annual renewal commission as well. Again the “me too” firms came in and offered to do the same deal. We were dismayed. We went to the investment companies and said, “You cannot offer a commission that is being used for nothing else than marketing.” They all agreed with us but did absolutely nothing about it. It was dispiriting because, although we had supported their funds for 16 years, it seemed that they were quite happy for us to die right there and then. While we all knew in our hearts that joining the discounters was the only long-term solution, the complexity that making the change would involve was daunting. It was at this low point in our fortunes that Theresa Barry came up with an answer that changed the whole way we did business. Although we didn’t know it at the time, it was to give us a business model that in one leap would put us ten years ahead of all our competitors.

Theresa argued that we had no choice but to compete with the surrender of renewal commission. Clients were already asking us whether they could have it and, while we had so many clients and so much money invested in PEPs that in theory we could have matched it, in practice it was impossible. The problem was that unless we held the investment ourselves, we had no idea whether or not a client had sold it. We would have had to check every single investment that every client had with every group to make sure they still held them. We would have no way of knowing at the point we paid out renewal commission whether or not we had actually been paid it. The whole idea was a logistical nightmare. I do not know how CommShare did that and we still don’t know how they do it today. We were dubious that they could. Theresa argued that the only way we could compete with them was if we became a plan manager ourselves and held the assets for all the ISAs that our clients had contracted to own. This was how our Vantage service, the jewel that lies at the heart of our business, was born.

1996: Many other small brokerages enter the fray offering increasing amounts of discounts and peppering the national press with tiny advertisements.

1997: PEP Shop go the whole hog and offer all their initial commission leading to discounts of up to 4%.

1998: Most other discount brokers offer to rebate their entire initial commission.

1999: A few brokers start to add the first year’s renewal commission to their initial commission discount, giving a total discount of up to 4.5%.

2000: Discounting reaches fever pitch when a few firms offer up to two years’ future renewal commission on selected funds, adding a further 1% to the initial discount.

2001: CommShare enters the market offering a share of the annual renewal commission going forward for any contract which lasts for five years.

2002: HL launches Vantage with a 5% discount and up to 0.5% renewal paid to clients as a loyalty bonus.