Interest in share-trading fuelled revenue growth on the UK’s investment platforms during the pandemic but emerging lower-cost alternatives are set to sharpen customers’ focus on fees and charges.
Hargreaves Lansdown, the industry juggernaut with a 43 per cent market share, expanded its customer base by nearly 197,000 people in 2021 to 1.5mn, while its closest competitor AJ Bell welcomed a 27 per cent surge in its customer numbers last year.
But newer, lower-cost rivals have also thrived. Vanguard Personal Investor, launched in 2017, now has 390,000 investors, after attracting 180,000 new users to its platform in 2021, up from 100,000 in 2020.
Mike Barrett, director at consultancy the Lang Cat, says the rise of alternatives to the traditional investment platforms may reflect investors setting greater store on cost-effectiveness. “Perhaps this is a sign of consumers becoming more price sensitive,” he says.
So-called “commission free” trading apps have seen rapid growth too. Freetrade, a mobile-only app which launched in 2016, has 815,000 customers in the UK with investment accounts, up from around 250,000 at the start of 2021.
Other options for managing your Isa money include robo-advisers, which provide largely automated investment recommendations, and full-service, traditional wealth managers.
Any service offering to look after your Isa investments will levy a fee or charge for doing so. Some customers may regard these costs as less important than ease of use, quality of service, financial resilience or the range of investments available. But given the need to preserve your wealth, it is important to understand what you are paying.
The most cost-effective platform will depend on how much money you have, how often you trade and what you want to invest in.
A key thing to check is whether you are being charged a fixed fee or a percentage of assets. For small accounts, a percentage of assets is likely to be a cheap option. For large accounts, a flat fee can save you a lot.
Interactive Investor is the largest platform to offer a flat-fee model across all of its products, with annual account fees starting at £120 per year. IG’s account fee is fixed at £96 per year, but you can only invest in listed securities.
iWeb, owned by Lloyds Banking Group, is one of the cheapest options available — it has no account fee — but you have to pay a £100 joining fee. Freetrade charges just £36 a year for its Isa, with no dealing fees.
Some platforms, including Hargreaves Lansdown, AJ Bell’s YouInvest and Fidelity Personal Investing, charge a percentage of assets for any unlisted funds you own on their platform, and cap the annual fee for listed securities.
Hargreaves Lansdown’s annual fund fees start at 0.45 per cent, compared with 0.35 per cent for Fidelity Personal Investing and 0.25 per cent for AJ Bell. All three cap the annual account fee for listed securities at between £40 (Fidelity) and £45 (Hargreaves).
Other platforms, such as Vanguard Personal Investor, Bestinvest, Willis Owen and Barclays Smart Investor charge a percentage of assets across all holdings, sometimes with a cap. Vanguard is the cheapest, starting at 0.15 per cent and capped at £375.
So how does this play out in practice? To illustrate the effect of fees, the chart below shows what you would have paid four of the largest platforms in fees every year had you invested £50,000 10 years ago into an unlisted world equity index tracker and left it. Hargreaves Lansdown has more than 1.1m active Isa accounts with an average size of £50,000.
The numbers are not exact because it assumes the fees are charged annually, and calculates against MSCI World Index returns rather than a fund, but it highlights how paying a percentage of assets as an annual fee gets more expensive as your funds grow.
Annual account fees are only one part of the story. Hargreaves has discounts on approximately one-third of funds on its platform (some can also be found on other platforms, but many cannot). It says the average saving across all the funds on its Wealth Shortlist, as a percentage of the original ongoing charges figure, is 20.9 per cent.
You also have to take dealing fees into account. Hargreaves Lansdown and Fidelity Personal Investing don’t charge any dealing fees for funds, AJ Bell charges £1.50 and Interactive Investor charges £7.99 but with one free trade per month (for its Investor plan).
For listed securities, while Hargreaves and AJ Bell’s account fees are cheaper, their dealing fees are higher than Interactive Investor’s (£11.95, £9.95 and £7.99, respectively). Vanguard charges no dealing fees for funds or ETFs but only Vanguard funds are available on its platform.
To have investment decisions made for you, a robo-adviser can also offer a low-cost solution. Nutmeg, the UK’s largest robo-adviser, charges 0.75 per cent (up to £100,000) to manage a portfolio. It will place your money in exchange traded funds (ETFs) with an average annual fund fee of 0.2 per cent on top of that. Moneybox, its closest rival, charges an annual fee of 0.45 per cent but you will pay fund fees of up to 0.58 per cent, according to its website.
For a more personalised — and higher priced — experience, wealth managers can handle the investments in your portfolio, typically with a dedicated adviser available to meet or answer queries by phone or email.
Brewin Dolphin, the UK’s largest wealth manager, charges an annual fee of 1.5 per cent for accounts up to £1mn for its wealth management service. The annual management fee at Rathbones, the next largest competitor, starts at 1.2 per cent.