Pay attention to the charges you pay

A recent high-profile case has highlighted the need for platform investors to consider other factors, too. The saga involving Neil Woodford has thrust the reliability of adviser best buy lists – in particular the one from Hargreaves Lansdown – firmly under the microscope.

But charges can be difficult to compare and analyse. To help on this front, we have examined some of the key costs incurred by platform users, and highlighted the potential impact of these on portfolios.

Generally, platforms offer three main wrappers to choose from: self-invested personal pensions (Sipps), individual savings accounts (Isas), and general investment accounts. Here we will focus on the first two, as general investment accounts operate similar charging structures to Isas.

Sipps and Isas subject investors to different platform fees. Evidence of this can be found in table 1, which details the features and charges of a selection of Isa platform providers.

Table 1: Features and charges of a selection of Isa providers

*Portfolio size (cost of 12 trades p.a.) Source: The lang cat. Prices include 12 deals, which could be made up of either buys or sells. A full trade is made up of one buy and one sell.

Isas

It makes sense to start by homing in on the FCA’s hot platform topic – exit fees. In March of this year, the regulator proposed to ban or cap exit fees within its investment platform market study. 

At the time, Christopher Woolard, executive director of strategy and competition at the FCA, said: “While the market is working well for most of its consumers, the package we’ve announced should make it less expensive and time-consuming for investors to shop around and move to the platform that best meets their needs. As part of that, we believe it is right that we restrict exit fees, so people can move their money freely.”

Earlier this year, Alliance Trust Savings – acquired by Interactive Investor in July 2019 – was charging as much as £100 for moving an Isa away from its platform. But shortly after the acquisition had been completed, Interactive Investor announced that these fees had been scrapped.

“Historically exit fees have been an issue, but thankfully they are starting to become extinct,” says Mike Barrett, consulting director at consultancy the lang cat. “The FCA’s recent platform market study found that 7 per cent of non-advised customers had tried to switch platforms at some point in the past three years but failed to do so due to the time involved, the complexity of the process and exit fees.”

Hargreaves Lansdown recently moved to scrap exit fees across all products on its platform, beating both the FCA and some of its rivals to the punch.

But exit fees are far from the only expense investors face. Table 1 – containing data compiled by the lang cat – shows the vast disparity in provider platform charges, and the resulting impact of these on portfolios of £20k and £100k. The table assumes investors are making 12 deals per year, which could either be buys or sells, with the total cost shown in both pounds and percentages. 

It highlights the challenges for investors looking to compare how costs can impact a portfolio. All platforms charge for trading, but these range from £5 per trade (iWeb) to £12.50 (Equiniti and Halifax) per trade. To further complicate matters, customers of the Share Centre can choose to pay either 1 per cent of the trade value, or £7.50 per trade with a £96 annual fee. For those looking to make frequent trades of high value, the latter option is likely to be favourable.

The important columns to cast your eyes over are those that highlight the total annual fees, with some of the figures proving hugely disparate. A straight cost comparison between Bestinvest and X-O is a case in point. On a £100k pot, annual fees plus 12 trades with the former total £490, with the latter only charging £71. The reason for this is almost purely down to annual holding charges. Bestinvest operates a tiered charging structure, with investors charged 0.40 per cent per year on the first £250k of the portfolio, 0.20 per cent on the next £750k, with no charge on assets north of £1m. Investors on X-O’s platform are only charged ad hoc dealing costs of £5.95 – nothing else. It is important to make clear, though, that this is purely an analysis of cost and not value. Therefore, investors who require more than just a stock trading account will see little attraction in X-O’s offering.

Sipps

The platform wrapper with unquestionably the largest array of charges is Sipps. A selection of these, plus other details, can be found in Table 2.

Mr Barrett outlines some key points for investors to ponder: “It’s important to consider the total cost of ownership when looking at investment costs, so this means platform charges – fixed and percentage-based – and the costs of the fund(s) you are investing in. For platform fees, one area we would encourage consumers to be aware of is the impact of a fixed fee if you are only investing a small amount.”

Fixed fees tend to be the norm within Sipp wrappers. The only exceptions being account and fund charges, plus – in some cases – telephone dealing costs.

As Table 2 shows, those still charging exit fees do so on a fixed basis. The most expensive, Rowanmoor, can charge up to £650 in this area, although this is a maximum figure and is only likely to be levied in complex cases. Others, such as AJ Bell, collect a more modest £75. 

Whether Hargreaves’ decision to scrap fees, plus the FCA’s expected ban, will encourage more platforms to follow suit remains to be seen.

Table 2: A selection of Sipp charges

Source: Providers

One important thing to note is that bigger pots attract lower proportionate account fees. Firstly, as Mr Barrett warns, not only will fixed fees cause less capital erosion on larger portfolios, but in addition to this, and as outlined in the Isa table too, annual account charges are often on a tiered basis, which reduce for more sizeable portfolios.

For any investors valuing simplicity within their Sipp, Close Brothers could prove a sensible choice. The platform only makes a handful of charges: a 0.25 per cent platform fee, a maximum £8.95 on fund deals, plus fees of £50 and £75 per year to set up and review drawdown, respectively, although there may also be management charges to pay on fund holdings.

A further area that warrants closer inspection is fund share classes – as importantly, not everyone who purchases units within a fund pays the same fee. These are normally different share classes for retail and institutional investors, with the latter carrying much lower charges. Retail investors cannot buy these units direct because they also have a high minimum purchase requirement, but platforms can buy them before breaking them down into much smaller lots to be made available to customers.

Darius McDermott, managing director at Chelsea Financial Services, says this is an area that may require investigation. “Some investors may well be in a more expensive share class, but they will have to have a look at their platform and see if a cheaper one is available – sometimes they are not. But you can usually see share class charges easily on platforms, so it's simply a case of looking, and if you can't, maybe give them a call and ask,” he says.

The costs of funds themselves are currently under scrutiny. Active managers are under pressure to justify their fees, with questions being raised about whether the additional costs deliver consistent outperformance.

The Woodford debacle has served to exacerbate the debate, while also prompting investors to consider funds other than those run by so-called ‘star’ managers. The demise of Mr Woodford’s eponymous business has acted as a stark warning that reputations do not always guarantee good performance. It could also be the case that alternative funds offer lower fees. However, finding these funds can be challenging as there are thousands to choose from.

For those looking to select funds, Mr McDermott underlines that high fees and big reputations do not always deliver top performance. He says: “[We] did a bit of research recently. We have access to data that allows us to rank funds by both first quartile performance – the best – and first quartile for low fees – the cheapest. Not all are well-known names.” This data is shown in table 3.

In conclusion, investors will need to ascertain whether their total platform fees constitute value. This is the case for charges on both platforms and the underlying funds. Mr Barrett outlines how consumers can make this value judgement.

“You should be clear about the total charges you are paying. Ask your platform for help here if needed, and be very wary if it can’t or won’t give you a clear figure. Once you know the cost, if you are happy with the returns and service you are receiving, then many investors will decide they are receiving value for money.”

Table 3:

*Source: FE Analytics, total returns is sterling, main share classes as defined by FE. These funds are all bottom decile for charges and top decile for performance over the past five years. Data is from 30 August 2014 to 30 August 2019.