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Until the second part of 2013, choosing which platform to use for your Isa was a simple affair – largely a matter of which one you liked the look of, or which had the best functionality or customer service.
Those things still matter, but cost has shot up the agenda ahead of the implementation of what many in the industry call “RDR 2” – the requirement that companies distributing financial products without advice disclose their charges separately, rather than bundling them in with the cost of the funds they sell. These rules take effect on April 6, and distributors have spent much of the first part of this year tweaking their models and taking potshots at their rivals.
The main change is that virtually every fund you invest in after April – and many that you might buy into before then – will be sold on a “clean” basis, with no payments of “trail commission” to platforms. That means the headline annual management charge (AMC) on a typical unit trust or open-ended investment company (Oeic) will fall from around 1.5 per cent to about 0.75 per cent (although the AMC forms only one part of the charge that funds levy for day-to-day management). Investment trusts never paid commissions and so their fees are not directly affected, although many are removing performance fees and simplifying charging structures in response to RDR 2.
Some of the larger “supermarkets”, most notably Hargreaves Lansdown and Fidelity Personal Investing, say they have used their distribution clout to negotiate better deals from some funds. But the numbers are small compared to the overall universe of about 2,000 open-ended funds and 400 investment trusts.
The reductions in annual management charges will be partly offset by the imposition of separate charges by the platforms. There are two basic business models. Ad valorem charges are percentage based, and what you pay depends on how much you have under administration. Fixed fees are levied at a flat price and so do not vary according to the size of your portfolio.
In very general terms, ad valorem fees often work out cheaper for those with smaller portfolios. Platforms that charge on a percentage basis tend to offer free dealing in open-ended funds, so you can buy, sell or switch as often as you like. Many also tier their charges, so the percentage rate is lower for larger portfolios. Most providers’ charges are clustered around 0.35 per cent a year for an average Isa; Hargreaves is higher at 0.45 per cent while Charles Stanley Direct and Cavendish are the market leaders on price, charging 0.25 per cent.
Fixed fees tend to work out cheaper for those with larger amounts under management. Fixed-fee operators such as Alliance Trust and Interactive Investor will invariably charge for each and every transaction, so expect to pay £10 or £12 each time you make a change to your portfolio – and note that selling one fund and buying another invariably counts as two transactions. Halifax Sharedealing makes no annual charge at all.
Less experienced investors with relatively small amounts to invest are best off with an established player, says Holly MacKay, founder of The Platforum. “A provider that offers a DIY investor portfolio or a buy list of quality funds is more meaningful than paying £5 a year less for platform services,” she says.
Her consultancy has evaluated costs and services across the industry and says that for those new to investing, Fidelity or Charles Stanley Direct have a good combination of price, resources and customer service. Bestinvest and Hargreaves Lansdown are also worth considering.
Andy Creak, director of rPlan, agrees. “It’s not so much about charges as what help I can get, so I don’t end up with an ‘accidental portfolio’.”
“The difference in cost might be half per centnt a year but the cost of making a mistake will be far greater,” he says.
All providers impose transaction charges for buying stock market traded instruments such as shares, investment trusts and exchange traded funds, although many also offer a reduced tariff for those who trade frequently. Some charge a separate administration fee for holding such assets, others include it all in the overall platform cost.
This may change things for those who want to hold both shares and funds. Ms Mackay recommends Charles Stanley Direct, AJ Bell Youinvest and Interactive Investor, which operates on a flat-fee basis, for those who have more varied investments.
Bear in mind that charges for extra services can vary widely too, as can fees for in specie transfers (where funds are transferred from one platform to another, rather than sold and repurchased).
Cost should never be the sole reason for choosing a platform; ease of use, customer service, the reliability of the technology and the choice of investments are all key factors too.
Guidance and advice
Full-service financial advice, delivered through an independent adviser and charged by the hour or via an annual fee, is generally considered uneconomic for smaller investor.
Fidelity Personal Investing has committed itself heavily to the concept of guidance, ranging from its “Pathfinder” portfolios aimed at relative beginners through to a full “supermarket” of funds for more experienced investors.
Mark Till, head of personal investing, says the service has helped attract users disenfranchised by the advent of direct charging for financial advice, and adds that the City regulator is not concerned that clients may mistake guidance – where the client is ultimately responsible for all investment decisions – for advice.
Nutmeg, a relatively new service, takes a different approach. For smaller portfolios, it charges 1 per cent a year, but does all the investing (mostly into exchange traded funds) after asking the investor a series of questions about age, objectives and risk appetite.
“Our research shows that around 80 per cent of people want to delegate this,” says founder Nick Hungerford, who likens the company to a wealth manager for the non-wealthy. “We do the asset allocation and choose the best instruments to implement that.”
This article has been amended since publication to rectify errors in the table.
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