No ribbon was cut and no minor member of the royal family attended but when Egg, the net-banking arm of Prudential, opened its online investment supermarket this week the effect was as dramatic as any gala event, particularly for its competitors.
The investment supermarket was originally an American idea.The biggest players over there are Fidelity and Charles Schwab, with first and second largest market share respectively and control of over 90% of the market. This side of the business alone is worth $176.8bn (£110bn) to Fidelity, which has just overtaken Schwab as market leader.
The principle of the investment supermarket is simple. Investors access a website which offers a broad range of mutual funds. These are available at a discount to the price the investor would pay if buying from an adviser or direct from the fund manager, which will usually charge the full initial charge - up to 5.25% - despite not providing advice. So far, it is hard to tell the difference between an investment or fund supermarket and a discount broker, and indeed, the two are very similar. But there are, in theory, two key points of contrast.
The first is that where a discount broker offers no advice at all, the supermarket does offer the investor limited guidance. Egg's version has a facility called the "investor profiler" which asks questions about the customer's financial circumstances to build a picture of their attitude to risk and the purpose of the investment. A basket of funds is then suggested on the basis of this picture. It is important that this should not be construed as advice - since that would require more severe regulation - so the recommendations are based on quite loose criteria.
Egg suggests a handful of funds based on fund sectors that appear to suit the investor's purposes. There is a fine line, however, between this type of service and the fund analysis service offered by many discount brokers. The only difference is that the brokers do not claim to make any recommendations, only to offer a view.
The other differentiator is that the supermarket allows investors to buy and sell within a single account to make it easier to track the value of all the holdings. Egg also provides something it calls the personal balance sheet, into which customers can enter all their financial details, including those held outside Egg. Elements of the customer's finances that Egg can get information on are updated automatically to create a consolidated record of all the customer's financial affairs.
Egg says the supermarket is designed to appeal to a broad church of relatively unsophisticated investors who are not comfortable with choosing investments from scratch but do not want to pay for advice. With a starting line-up of only 169 funds out of a universe of over 1,500 unit trusts and open ended-investment companies they certainly will not be bamboozled. Mike Harris, chief executive of Egg, says this is deliberate: "To have 169 funds covering all sectors is enough for most investors," he says.
Despite that, Egg does plan to add more to the range as time goes by, but there is a long way to go before it reaches the breadth of service offered by Fidelity in the US, which sells 4,100 funds. Of these 900 have no initial charge; these are known as "no load" funds which have not really taken off in the UK.
Another limitation on Egg's market is that until the new tax year, which starts on April 6, only Egg's 1m customers will be able to use it. After that date, it will be open to anyone who opens an Egg savings account.
Egg was not the only outfit to open a supermarket this week. Torquil Clark (TC), a Wolverhampton-based advisory broker, also joined the fray. TC's service offers access to 600 funds from 39 managers. TC's 35,000 personal equity plan (Pep) and Isa customers already use the site to track the £350m that is invested in their portfolios but is unlikely to be able to compete against Egg, which has a stronger brand and can draw on the deep pockets of the Pru to maintain a competitive edge.
The introductory offers are an illustration of this. Until April 27, visitors to the Egg supermarket will be able to claim a 1% cashback on any Isa investment. Where the Isa carries no initial charge - most do not - the investor stands to make an instant profit. There are also discounts that bring the initial charges down to a maximum of 1.5% and minimum of 0% - rather than a typical 3.5% to 5.25% - on other funds sold through the market. TC's offers comprise an ongoing £25 flat fee for Isa investments and discounts of up to 5.25%. These are good value, but do not have the instant appeal of the cashback offer.
In fact, the cashback offer has forced at least one other discount broker to revise its marketing strategy - an early indication of the sort of pressure Egg is likely to exert on the current players in the market. Allenbridge, the third largest discount broker in the UK, has traditionally offered a guarantee that its discounts are the lowest to be found. This was backed up by an offer to double the difference if anyone can find a better discount elsewhere.
Anthony Yadgaroff, managing director of Allenbridge, says since Egg made its cashback offer Allenbridge can no longer afford to maintain this guarantee. Allenbridge pays for its guarantee by giving up trail commission for sufficient time to make up the cost. To match Egg's deal would mean making no money for five years. However, the firm will fight back with its own fund supermarket, which is currently under development. It hopes to offer Sharpe ratios and other specialised risk and return measures as part of the service.
Mark Dampier, head of research at Hargreaves Lansdown, the UK's largest discount broker, seems more perplexed than alarmed by the Egg deal. "When I first heard about these things a while ago I thought: 'These things could be bad news for us,' but so far I just don't see it," he says. Fidelity and Charles Schwab, with their experience in the US market, are taking a clearer view and plan to launch their own supermarkets this summer.
Few details are available on the Schwab project, but a spokeswoman says it will start off in a fairly modest way with a limited range of funds. Fidelity will provide a similar range of fund managers, but each will make their whole range available bringing the total funds on offer to about 300. It will also set up a site for financial advisers.
