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When Linda acquired a lump sum of cash last year after a business sale, she wasn’t sure what to do with it. “I put most of it in bank accounts — it terrified me,” she says.
But, determined to make the investment decisions herself, she set about teaching herself about the best place for her money. It was only then that she made a discovery about the investment platform she had used for a decade.
“I used Hargreaves Lansdown for around 10 years and had no idea how expensive they were,” says Linda, who asked us not to disclose her real name. “I woke up when I had a large sum to invest and had to educate myself.”
Linda’s story will be familiar to many. In the hustle and bustle of day-to-day life, it is hard to sit down and work out the most cost-efficient way to invest. Often, it takes a big life change, such as Linda’s business sale, or coming into an inheritance to encourage investors to scrutinise their current providers’ fee structure and look across the other offerings in the market.
The impact of platform fees on your portfolio cannot be overstated and are as important as the performance of your underlying investments, if not more so.
The Lang Cat, a consultancy, has run the numbers. Say you invest £100,000 and it grows by 6 per cent each year. Over a decade, an overall annual fee of 1.5 per cent would cost you an additional £7,600 compared with a 1 per cent fee. Over 20 years, that half a percentage point in fees would cost an extra £24,000.
The problem is, there is no “best” platform for investing, as all charge in different and sometimes complex ways. The cost efficiency depends on what savers are looking for.
So how do you pick the right platform for you? And what other considerations — apart from fees — should investors keep in mind?
Many FT Money readers contacted us to say they had moved their investment portfolios to different platforms as a result of higher fees, often discovered by accident.
Bill, who also asked to remain anonymous, says he recently moved to Interactive Investor from Hargreaves Lansdown, based entirely on a fee assessment. He had £400,000 across an Isa and Sipp invested in a range of funds and shares, including passive ETFs.
“I went on holiday with a friend and it was he who told me the fees differential between both platforms,” he says. “I was a bit surprised, then looked into it, and changed providers immediately.” Bill decided to move to Interactive Investor, which has a flat monthly fee. He estimates his new charges are a 90 per cent reduction on what he previously paid, equal to a few thousand pounds per year.
Despite regulations being introduced last year, forcing financial services firms to adhere to higher and clearer standards of consumer protection, it is still tricky to compare and contrast investment platforms’ charging structures, which are often complex.
There are three main things to bear in mind when looking for the platform that best suits your needs.
First, work out how much money you think you will invest overall, as most platforms charge based on a percentage of assets, which reduces if you reach certain thresholds. For instance, Hargreaves Lansdown charges 0.45 per cent for stocks and shares Isas containing up to £250,000 in funds, dropping to 0.25 per cent for £250,000 to £1mn, and bottoming out at no charge for the value of any portfolio above £2mn.
At AJ Bell, one of the other big DIY platforms, these charges start at 0.25 per cent for the first £250,000 for accounts with funds in them, dropping to 0.1 per cent for assets between £250,000 and £500,000, above which there is no charge.
For those looking to invest more than £25,000, it is worth comparing and contrasting fees with a platform that offers a fixed monthly fee, such as Interactive Investor, where charges start at £4.99 a month, moving up to £11.99 a month for those investing more than £50,000.
These fees can differ depending on the tax wrapper you use, as many platforms have a different charging structure for Sipps, stocks and shares Isas and Lifetime Isas.
Monthly or annual charges do not include fees for trading — buying and selling holdings. How regularly an investor plans to do this is the second factor to bear in mind.
For instance, investing £15,000 in funds and £5,000 in shares in Hargreaves Lansdown’s stocks and shares Isa would result in a charge of £90 per year, or £7.50 per month. The platform then charges depending on how many trades you place in a past month — starting at £11.95 per trade and dropping to £5.95 for those who have placed more than 20 trades in the previous month. There are no charges for buying funds.
In contrast, AJ Bell charges £5 per share dealing, dropping to £3.50 if you bought or sold shares or funds more than 10 times in the previous month, as well as a £1.50 cost for buying funds.
And how you place a trade can impact price — for instance, Fidelity charges £7.50 for each deal placed online in a stocks and shares Isa, but £30 for trades placed over the phone.
Third, savers should think about how they will invest — shares, active or passive funds, investment trusts or exchange traded funds (ETFs) — as the charges can vary. For example, Hargreaves Lansdown has a sliding scale of charges for holding funds in its stocks and shares Isa, but has a cap of £3.75 in fees per month for UK and overseas shares, ETFs, investment trusts and bonds.
Many platforms cap the costs of certain investments. For instance, Fidelity will not charge more than £90 a year for the fees paid on exchange-traded instruments (shares and ETFs for example) within an Isa or Sipp.
Some providers do not offer every single fund or share investors want, so it is worth checking their offerings before investing. Those looking to invest in passive funds may look at Vanguard’s platform, for example, which has lower fees than many other platforms, including a cap of £375 per investor per year, however you are limited to buying just Vanguard’s products.
Many readers highlighted the unexpected costs of buying and selling international shares and funds. These charges can vary hugely per platform. Hargreaves Lansdown charges a dealing fee plus a 1 per cent charge for the first £5,000 of any deal. If, for instance, an investor had not made any trades in the previous month and then bought £5,000 worth of US shares, they would pay nearly £62 for the trade.
Investors should also be aware they need to fill out a W-8 BEN form before they buy US or Canadian shares, which entitles them to tax savings on dividends or interest earned.
Since the start of the year, Ben, another FT reader, says he has been buying single US stocks, and is in the process of switching his stocks and shares Isa to Trading 212 due to its lower foreign transaction charges and no commission or subscription fee.
One way to circumvent these fees is to buy foreign stocks via funds or ETFs based in the UK.
Cash holdings can be another way to accumulate unwanted fees. According to a recent regulatory survey, the majority of the 42 platforms they looked at retained some of the interest earned on customers’ cash balances. Many also charged customers a fee for holding cash, known as “double dipping”.
The Financial Conduct Authority has repeatedly warned investment platforms that they must pass on higher interest rates to savers, after they began to reap big profits from failing to do so. The City watchdog has said it will intervene if it thinks platforms are not treating customers fairly.
In December, the FCA’s executive director of consumers and competition, Sheldon Mills, said: “Rising rates mean greater returns on cash. Investment platforms and Sipp operators need now to ensure . . . the interest they retain . . . results in fair value.”
Investment platforms to consider if you are . . .
If a saver does not think they’re getting the best deal from their platform, it is always worth notifying their current provider and telling them they are thinking of leaving. “I complained to my platform provider about their platform fee several years ago and in response they cut them,” says Martin, whose fees were cut by 2 percentage points.
However, the cap on fees was also removed at the same time, which made sense while the portfolio was below this level, but once it reached that threshold he was no longer saving money.
“I therefore switched all my own funds to Vanguard and saved about £1,000 per annum in fees,” Martin says.
“Admittedly the selection of investments at Vanguard is limited to their own funds, mainly focused on index trackers.” His previous provider offered a much wider range, he says. “But I’m personally happy with index tracker investing.”
If an investor continues to believe switching is the right decision, it is important to ensure they will not incur extra costs for leaving and to work out how long a transfer will take. A large number of platforms have removed exit fees after regulatory intervention, but the process can still take months. Making sure simple things like name spelling and date of birth are correct are particularly important — and easy to get wrong when dealing with piles of admin.
Transferring in specie (where your portfolio remains invested as you move, rather than selling up and buying it all again) is recommended, but it is worth checking that your new platform offers all your existing investments.
Though fees will have an outsized impact on investment returns, for certain people there are other considerations when it comes to picking an investment platform.
“Cost is a key factor to consider, but I think investors also need to think about how confident they are, whether they want great people on the phones or prefer a brilliant app,” says Holly Mackay, founder and chief executive of Boring Money.
Less-confident investors may want to look instead at using a robo-adviser, where you pay a fee for an automated investment portfolio plan. UK robo-advisers include Nutmeg and Wealthify and vary in cost and offerings, from ready-made portfolios to those constructed to match customers to a certain investment style.
“Fees are important but so is [the] ability to provide capital gains and loss reports for tax filings,” says Gregory Eckersley, an FT reader from Buckinghamshire. “This report is expensive if done by a tax consultant so I switched because of it.”
Another reader, Sam, switched to AJ Bell, partly due to fees but also because he thought the management reporting was far better. “I can pull off lists of all dividends paid very easily . . . this was by no means just about fees,” he says.
For others, customer service is a big selling factor. Some savers might be happier with a light-touch approach, whereas the priority for others might be to be able to speak to someone at the end of the phone when they’ve got questions or issues.
Companies such as Boring Money run annual surveys ranking platforms’ customer service levels and usability.
These factors are important to investors — one FT Money reader says they know their platform, Hargreaves Lansdown, has higher fees than some others, but they like its safety, availability of investments and customer service.
Hargreaves Lansdown — the largest investment platform in the UK with more than £142bn in assets — says it uses its scale to deliver value for its clients. “We deliver fund discounts of £48mn a year, price improvements of £16 per trade on share trades, and market leading cash interest rates on Active Savings.” The investment site this week rejected a £4.67bn takeover approach from a group of private equity firms.
It is clear that, even though the regulator has focused strongly on fee transparency, costs remain complex and hard to compare.
Some FT Money readers say their confusion over what they were actually paying led to inertia when thinking about moving.
“[Fee structure is] not that difficult to calculate, but it is sufficiently difficult for me to not want to work it out,” one tells FT Money. “I haven’t yet changed platforms . . . it is clear that the worst option is splitting the pot up and paying the maximum of everyone’s charges.”
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