Investors using old-style execution-only brokers to hold shares and funds could be paying up to 45 times more than they need to for their broker and platform services.
Research from Candid Financial Advice shows investors who don't need advice could drastically reduce the fees they pay by switching to a low cost broker or fund platform that uses clean share classes.
Someone with a £300,000 Isa portfolio held with a discount broker with non-rebatable 0.5 per cent annual commission and a 1.54 per cent annual fee for 'retail' share class funds , would pay £2,250 a year in fees, its research shows.
This is compared to someone with the same amount invested using a lower-cost broker with 'clean' fund versions and a 0.79 per cent charge, who would only pay £48 in annual fees for the same service.
Collectively, investors are paying more than £27.5m to execution only discount brokers who retain all ongoing trail commission and provide no advice.
Candid Financial Advice identified 11 discount brokers who keep all trail commission and make customers pay full annual fund charges, which normally sit at about 1.6 per cent a year. The 11 brokers are: Chelsea Financial Services, Close Brothers, Dennehy Weller, Elson Associates, Financial Discounts Direct, Fundsnet, Moneysupermarket, Moneyworld, Seymour Sinclair, SFS Invest Direct and Willis Owen.
Rule changes mean these brokers must start charging an explicit fee for their services by 6 April next year for new investments. However, trail commission can persist for exising investments until April 2016, so affected customers would be wise to review their positon sooner rather than later.
Alliance Trust Savings, Sippdeal and Charles Stanley Direct all use clean funds and are lower-cost brokers.
Lower cost discount brokers who use clean funds
| Broker | Annual Fee on £300,000 Isa portfolio | Effective Annual cost for broker & platform | Projected Portfolio Value after 10 years* |
| Alliance Trust Savings | £48** | £48 | £547,315 |
| Sippdeal | £50† | £50 | £547,286 |
| Charles Stanley Direct | 0.25% | £750 | £535,231 |
Source: Candid Financial Advice
Notes: *Assumes 7% annual growth before charges, **£12.50 dealing charge, †£50 annual fee gives access to clean fund versions. £3.95 online dealing charge
However, investors thinking of moving should watch out for high exit fees for transferring out holdings. These may cancel out some of the benefit of moving to a lower cost broker or platform.
Justin Modray, the founder of Candid Financial Advice and Comparefundplatforms.com said: "Finding the best fund deals has become increasingly complex. We're seeing discount brokers posing as fund platforms and fund platforms taking on discount brokers, some using new 'clean' fund classes while others continue rebating commissions.
"There's no single overall 'best buy' platform at present, the best deals depend on how much you're investing, how often you'll switch funds or trade shares, whether you want an ISA or SIPP wrapper and the funds you'll hold."
