Shopping for the best Isa provider

What you end up buying will be down to your own circumstances and risk appetite. For how and where to buy the Isa, we can give you a picture of the marketplace and what to look for.

It's an important decision, though. Over the long term, costs can have a big impact on your returns, and they're one of the few aspects of investing you can control. Your choice of provider will also impact the overall costs of investing, the spread of funds and shares you have to choose from as well as the quality of investment research and administrative support you receive.

Stocks and shares Isas or self-select Isas are offered by a wide range of providers and your choice should first be determined by what you want to hold in the Isa wrapper – and the price you are willing to pay.

Fund management companies will often allow you to invest in their funds via an Isa savings scheme, and for those investment trusts that offer Isa saving schemes, it can still be cost-effective, especially if you want to 'drip feed' money into your Isa. You can find more details of the trusts that offer this facility on the Association of Investment Companies website at http://www.theaic.co.uk/.

Very few investors buy unit trusts or open-ended investment companies direct from the providers, though. The vast majority of investors now use fund supermarkets or platforms, which allow them to hold funds from different providers and benefit from lower initial charges on fund purchases. In these cases, the Isa wrapper will be administered by the supermarket, rather than by the individual fund manager, and you will be able to spread your annual Isa allowance between different funds from different asset managers.

Supermarket sweep

Fund supermarkets have evolved rapidly from offering open-ended funds and not much else to boasting a spread of investments, including exchange-traded funds (ETFs) shares and investment trusts. These platforms also provide investors with comprehensive research and reporting services. The Isa application process is simplified, and it's relatively quick and easy to switch between different funds. Administration and paperwork is also reduced – you get one statement with all your investments listed. If you want to switch providers, it's fairly easy to do so (although there may be a transfer-out charge). You can view your holdings and statements electronically, too, whenever you wish.

But, arguably, the most enticing feature of a fund supermarket is the reduced cost of fund charges, which can make a significant difference to your investment portfolio over time. The sheer volume of funds sold by fund supermarkets enable them to offer attractive discounts on the initial charges, in many cases reducing it to nothing. There is often some discount on the annual management charges, too. This is a far more cost-effective way of investing than buying directly from the asset manager.

Currently, the UK platform market is dominated by the so-called big five: Hargreaves Lansdown's Vantage service, Fidelity FundsNetwork, Cofunds, Transact and Skandia. While some fund supermarkets – typically those provided by discount brokers – sell direct to the investor, others such as Cofunds, Transact and Skandia are only available via an IFA.

In recent years, the established platforms have been joined by online stockbrokers such as TD Direct Investing, Selftrade, Halifax Sharedealing and most recently Barclays Stockbrokers, all of which now offer managed funds as well as shares, ETFs and investment trusts. Like the original platforms, they allow you to hold a mixture of allowable assets within one Isa.

Choosing an Isa platform

So how do you choose? If you want to take a DIY approach to your portfolio, making your own investment decisions, you might want to consider the following:

■ Choice of funds. While most fund supermarkets offer access to a range of open-ended funds, not all provide access to investment trusts and ETFs. Fidelity FundsNetwork, for example, does not offer ETFs and shares and only a limited number of Fidelity managed investment trusts. ETFs and individual shares are available on ShareNetwork. There is a £5.10 monthly account fee and an online trading fee of £9 a deal. Barclays Stockbrokers recently announced a new and enhanced funds offering for investors, which features a significantly expanded funds range offered in collaboration with Fidelity FundsNetwork. Investors will have access to a spread of close to 3,000 funds. There are no initial charges, no dealing commissions and no account charges when clients are fully invested in the Barclays Stockbrokers Funds Market.

■ Research & data: Look at the research capacity of the fund supermarket and the added value they offer. Many fund supermarkets boast comprehensive research teams that can provide valuable in-house research on funds and fund managers. They may also offer fund portfolio reviews, fund recommendations and monthly or quarterly newsletters. Modern Wealth Management (MWM), a new platform launched by Danish bank Saxo, provides easy-to-use and visual tools to manage investments, along with educational articles and videos, blogs and smart infographics and the ability to converse with peers.

■ Rebates and bonuses. Most platforms make money because fund management companies pay them 'trail commissions' each year. Those are taken out of the annual fund management charge you pay. Some platforms will share part of that commission with you – Hargreaves Lansdown, Barclays and others do this via 'loyalty bonuses' for instance. Others will rebate it all, as Alliance Trust does. However, Alliance Trust charges commission on fund purchases and a £25 (plus VAT) administration fee, whereas Hargreaves' fund trades are free and its administration fee only applies if you hold investment trusts, shares, or ETFs. Which structure is better for you will depend on what you own – with cheap tracker funds, there will be little or no trail commission to rebate – and how much you have invested.

■ Other charges. Hargreaves Lansdown recently introduced 'platform fees' of £1 or £2 a month on funds that don't pay it much (or any) trail commission. These can have a big impact on investors with smaller holdings. Some platforms charge inactivity fees if you don't make any share trades for a while, while others make an annual levy for administration. Most will charge you for transferring your holdings to another provider, and all will charge commission on a share, investment trust or ETF trade (the more trades you make, the cheaper it tends to get – trades on Sippdeal's Isa platform can cost as little as £4.95 if you trade a lot). The cheapest charges always assume you deal online – if you want to speak to a human, you may pay more.

■ Percentage or fixed? Investors with large Isa investments can make sizeable savings in charges by paying attention to whether the charges are percentage-based, fixed rate or capped. The Scottish Investment Trust's (SIT) stocks-and-shares Isa, for example, offers investors access to a global portfolio of international equities via the trust of the same name, at an annual charge is 0.6 per cent (including VAT) of the value of the Isa investment capped at £30 (plus VAT). The 0.6 per cent charge benefits small investors while the capped charge favours larger investors. For example, an investor with an Isa valued at £1,000 would only pay £6, while an investor with an Isa valued at £10,680 would pay the capped charge of £30 plus VAT – without the cap the percentage charge of 0.6 per cent a year of the value of this investment would come to £64.08. Over time, these differences can be very material; an investor who'd put their entire Isa allowance for each tax year since the launch of Isas in 1999 would have invested – ignoring any gains or losses due to market movements – a total of £98,280 over this period. The cap keeps the management charge at £30 plus VAT; without it, you'd be £491.40 this year.

New and notable

Competition is fierce, and new offers come and go all the time. Also, there are several smaller Isa fund platforms that have noteworthy features. Bestinvest claims its loyalty bonus – which also applies to its Junior Isa – saves an investor up to 0.5 per cent each year of the value of funds invested. In addition to the loyalty bonus, investors pay no initial charge on nearly all funds, no Isa administration fee and no dealing fee.

Bestinvest says an Isa investor wishing to invest £10,680 in a portfolio of top-rated funds with Bestinvest would save £110 in the first year compared with buying from Fidelity, £24 compared with Hargreaves Lansdown and £461 compared with buying directly from the fund manager. An investor wishing to invest solely in passive (tracker) funds would save £156 in the first year compared with buying from Hargreaves and £20 compared with Fidelity, as the table shows.

Notes: The above table includes initial charges, any discounts in initial charge, fund annual charges, annual fund savings or loyalty bonuses and dealing fees. Source: Bestinvest.

For those who prefer to speak to a real person, as opposed to dealing with a computer, stockbroker Willis Owen offers Isa guidance 24 hours a day, seven days a week – you can call them on 0800 597 2525. Investors have access to over 1,500 funds from more than 90 investment houses with a free Isa transfer service and investment check-up service. Willis Owen, like Hargreaves Lansdown and Fidelity FundsNetwork, also offers access to an Isa Cash Reserve Fund in which you can park your money while you decide where to invest.

Discount broker Cavendish Online is one of the most recent companies to launch a Funds Supermarket, claiming it to be the cheapest possible route to buy and manage a stocks-and-shares Isa. The platform will not charge investors anything to buy and manage their Isa or Junior Isa. As well as a rebate of all trail commission, there is no switching fee, no online fee and no initial charge on funds.

Investors will have access to over 1,200 funds. However, one caveat is that the fund supermarket currently only offers Oeics and a few investment trusts, although managing director Ian Williams says ETFs will come on board in a few months, and equities in about a year on the current build schedule. Cavendish provided the table below to show how its lower charges stack up against the competition – although this presumes that the charging arrangements remain the same over the 10-year period. The figures are based on an investment into the Invesco Perpetual High Income fund, the UK's most popular.

Notes: Assumed growth of 5 per cent, includes annual management charges and renewal commission reinvested for H–L (50 per cent) and Cavendish Online (100 per cent).