How to buy a DIY Isa cheaply

If you want to be in control of the assets in your Isa you should hold your investments on a DIY investment platform. Platform accounts give you a single portfolio valuation and often allow you to hold shares and funds in the same place, so keeping track of your investments is straightforward. They also often give cheap deals on a range of investment funds that allow you to buy funds more cheaply than if you bought them direct from the fund manager.

Getting your head around charges

Choosing a platform is confusing because different platforms refer to their charges in very different ways.

The main fees break down into annual administration charges and dealing fees. Platforms tend to charge either flat fees or a percentage of total holdings, with flat fees working better for larger portfolios.

The annual administration fees are then often broken down into fees for fund administration and share administration. If you have a mixed portfolio, make sure you have looked at all the fees that will affect you. In some cases you could avoid a chunk of fees if you are only investing in one type of asset class.

You should also consider how active you are as a trader. One platform could offer a very low annual charge, but hit you with dealing costs that mean you end up paying more in the long run. However, many platforms and brokers offer free fund dealing.

CASE STUDY ONE: Building up an Isa portfolio

If you have around £15,000 to invest in your Isa, assuming monthly savings of around £1,000 for at least 10 years but are not an active trader, the main things to consider are annual administration and funds charges. Dealing fees will not be a big issue for you as you are unlikely to be trading your investments frequently.

Fund charges

When it comes to smaller investment pots, percentage charges will be preferable to fixed amounts.

AXA Self Investor is one of the cheapest platforms for your first year of investing as it will charge you no fees until May 2016 and then 0.35 per cent per year after that on investments up to £250,000. It is a funds-only platform so you will not be able to trade shares here, but funds dealing is free.

Fidelity Personal Investing is running a similar deal for fund investors, waiving platform fees for the first 12 months and then charging 0.35 per cent on investments up to £250,000. If you want to hold shares with Fidelity, you need to open a ShareNetwork Isa.

AXA and Fidelity do not charge you for leaving the platform, meaning you could transfer your Isa elsewhere when the fees hit.

AJ Bell Youinvest offers a cheap annual fee for funds at 0.20 per cent per year, capped at £50 per quarter - but it also charges for fund dealing (£4.95 for purchases and £9.90 for swaps). Charles Stanley Direct is also competitive, charging 0.25 per cent per year on the first £500,000 of funds held across all accounts.

It is also worth noting that Barclays Stockbrokers, which normally charges a £36 per year Isa wrapper fee, as well as a 0.35 per cent annual fund administration fee, waives the Isa wrapper fee if you invest only in funds.

When you combine any additional Isa administration fees with the charges you would incur for purchasing funds, the picture looks slightly different, but AXA, Fidelity and Charles Stanley all remain at the top. Independent platform expert Holly Mackay has modelled the costs for the first year for an investor with £15,000 (see table below).

Lowest first year costs for a £15,000 Isa

Notes: Assumes 8 funds purchased at outset and monthly top up investments of £1,000.

Source: HollyMackay.com

Over the longer term, the cost picture could be very different. Research from CompareFundPlatforms.com suggests that if the Isa investor makes one fund switch a year for the next 10 years, Charles Stanley would still be appealing in terms of long-term cost impact, but would be beaten by Interactive Investor to the tune of £409. These figures are indicative only as they include assumptions of a 7 per cent annual return on the underlying portfolio, which will alter the cost impact of fees.

Holding funds alongside shares

For an investor with a £15,000 Isa portfolio, investing £1,000 a month, but holding shares alongside funds, the picture will look slightly different. At least four providers have different costs if you want to invest in shares (including closed-ended investment trusts and exchange traded funds) as well as funds.

Fidelity does not allow you to hold shares and funds in the same Isa account. The platform's ShareNetwork service is managed by Charles Stanley and has a separate fee structure. AXA Self Investor doesn't allow shares at all.

With Charles Stanley Direct, for an investor putting £10,000 into funds and £5,000 into shares, the cost (assuming the purchase of eight funds and five shares at a cost of £10 per trade) would rise to £97.50 due to sharedealing costs and a minimum £20 administration charge for closed-ended investments.

At Barclays Stockbrokers your costs would rise to £82.94, taking into account the £11.95 monthly sharedealing fee for 1-9 trades and a £36 wrapper fee added to the fund administration charge.

Costs of fund and share investing on DIY investment platforms

Source: The Platforum UK D2C Guide Feb 2015

CASE STUDY TWO: Well-established Isa investor with a large portfolio

If you have a larger portfolio, flat-fee administration fees are more compelling.

Alliance Trust Savings, which offers a quarterly fee of £18.75, is good for large accounts. It was one of the first to champion clean share classes and is good value for accounts over £100,000. Interactive Investor offers an £80 annual fee, which also gives you two free trades per quarter. The Share Centre has a fixed fee of £4.80 a month for its Self-Select Isa account, plus transaction fees of 1 per cent per deal, or a minimum of £7.50.

Ms Mackay has modelled the costs for a portfolio of £100,000 invested solely in funds, with 12 purchased on set-up. AXA and Fidelity still emerge as the cheapest due to their short-term offers, but Interactive Investor starts to look more appealing as a percentage of your total portfolio.

In this scenario, the fees on a Hargreaves Lansdown account would amount to 0.45 per cent of your total savings, as opposed to just 0.22 per cent for Alliance Trust Savings and 0.18 per cent for Interactive Investor.

Lowest first year costs for £100,000 Isa portfolio of 12 funds

Source: Holly Mackay. Note: The research did not include The Share Centre.

Holding Isas alongside self-invested personal pensions (Sipps)

If you are an established saver you are more likely to have a Sipp and an Isa, mixed between shares and fund investments. In this scenario, if you hold them on the same platform you may benefit from paying a single platform fee, but you will usually incur charges for both wrappers as well as dealing charges on funds and shares.

Lowest first-year costs for £40,000 Isa and £60,000 Sipp invested in funds and shares

Notes: Table assumes Isa holds £32,000 in eight funds and £8,000 in two shares. Sipp holds £40,000 in 8 funds and £20,000 in 6 shares.

Source: Holly Mackay

CASE STUDY THREE: Frequent trader

Many platforms will charge you less the more frequently you trade funds and shares. These include Interactive Investor, which charges you £5 per trade if you deal more than ten times in a month and Charles Stanley, which does not charge you an administration fee on shares if you make more than six trades in a six-month period. However, that reduction needs to be weighed up against a £10 per online trade fee.

The cheapest platforms when it comes to dealing costs for someone trading funds and shares are iWeb*, Bestinvest and the Share Centre. iWeb has the lowest transaction cost for shares starting at £5.

But as the table below demonstrates, annual fees can cut into low transaction costs meaning that even for frequent traders, it is important to think about the whole picture.

Lowest annual cost of trading funds and shares in a £100,000 Isa*

Source: Investors Chronicle using data from The Platforum. Notes: *Includes administration fees. The table assumes ten trades per year in both shares and funds. It also assumes an annual fee of £24 paid to the Share Centre to reduce transaction fees.

It's not all about cost

There is more to choosing a platform than price. Some sites offer a wealth of resources and are easy to navigate, while others are more suitable to sophisticated investors, or are clunky and hard to use. Some sites, such as Hargreaves Lansdown, might be more expensive than their peers but offer a comprehensive suite of options and are well constructed for a wide range of investors. On the other hand, iWeb is a more sparse and functional system that does not offer the research and services of other options, but has very low dealing costs.

Source: Holly Mackay

*Since this article was written iWeb has increased its charge to a £200 set-up fee.

Click here for more Isa investment ideas, including funds, investment trusts, shares and passives.