- Investment trust platform charges can be much lower than open-ended funds
- Important to consider how trusts fit into your wider portfolio
Fund managers often face a lot of scrutiny around how much they charge, and rightly so. But you also need to think about how much your platform is charging when considering the overall cost of investment.
Most people use a do-it-yourself investment platform to buy investment trusts, as this is efficient and cheap. With the online platform market having grown rapidly in recent years, there is now a broad range of credible low-cost options for buying investment trusts and it is well worth taking the time to make sure you pick the best option for you. This could save you a lot of sweat and money in the long run.
Funds versus investments trusts
Holding investment trusts on platforms can be considerably cheaper than holding open-ended funds, depending on which platform you use. Because investment trusts are listed securities, they have the same fees as shares and exchange traded funds.
Hargreaves Lansdown is the platform with the most distinct difference from its peers. Fund investors pay 0.45 per cent on the first £250,000 of assets under management, with fees reducing on a sliding scale thereafter. This means an investor holding £250,000 in funds on Hargreaves Lansdown will pay £1,125 per year. Fees for investment trusts are capped at £45 per year, which can make a big difference over time. Fidelity Personal Investing also caps fees at £45 per year for investment trusts, but open-ended fund holders pay 0.35 per cent on the first £250,000 invested.
AJ Bell Youinvest caps fees for investment trusts, although the cost discrepancy between holding trusts and open-ended funds is less stark. Fund investors pay 0.25 per cent on the first £250,000, whereas investment trust fees are capped at £30 per year for individual savings accounts (Isas) and general investment accounts. IG charges £96 per year, with fees paid quarterly.
Interactive investor has a different charging structure, with a Netflix-like subscription model. For investors with large portfolios of funds, this makes pricing very competitive as they just pay a flat rate. However, it makes it one of the more expensive platforms for investment trusts as you will pay a minimum of £120 per year, doubling for the £240 for their super investor plan (where dealing fees are lower).
Some platforms charge the same in annual fees for funds and investment trusts. Bestinvest charges 0.4 per cent on the first £250,000 invested (with no charge on funds over £1m) and Charles Stanley Direct charges 0.35 per cent on the first £250,000 (with no charge on funds worth over £2m). For investors with large portfolios who want to buy investment trusts, these platforms could work out to be considerably more expensive than others.
Many commission-free stock trading apps such as Trading 212 and eToro do not offer investment trusts. Freetrade, however, does. General investment account holders pay no charge for their basic service or £10 per month for a premium option, which has more stocks available and an enhanced service.
Dealing fees are an important part of the overall cost of investing. But when it comes to buying investment trusts, because most of the online brokers charge similar amounts, this is unlikely to be the deciding factor when selecting your platform. Investment trusts are designed to be held for the long term (most managers say at least five years) so whether you pay £5 to transact or £12, this will make a very small difference to your return over a longer period. It is more important to look at what the trust’s management charges are and how often managers buy and sell within the fund, which can eat away at your returns.
At the cheaper end of the dealing scale is IG, which charges just £3 per trade, iWeb which charges £5 and Barclays Smart Investor which charges £6. Some platforms lower the dealing charges depending on how often you traded in the previous month. Hargreaves Lansdown, for example, has a standard dealing fee of £11.95, but this drops to £5.95 per trade if you dealt 20 or more times in the previous month. If you hold investment trusts alongside a portfolio of individual stocks that you trade more frequently, this could lower your dealing fees.
As shown in the table below, Fidelity Personal Investing, AJ Bell Youinvest and iDealing charge about £10 per trade and interactive investor charges £7.99, dropping to £4.99 for their premium subscription. Halifax and EQi each charge £12.50 per trade. Freetrade does not charge dealing fees. Most major platforms will let you deal over the phone, but charge a premium for this service. With Freetrade and iWeb, phone dealing is not available.
Some brokers that offer a more bespoke service charge a percentage of the amount invested. This makes dealing much more expensive. Redmayne Bentley, for example, charges 1.75 per cent on the first £10,000 invested, and 0.5 per cent thereafter. Pilling charges 1.65 per cent on the first £10,000, with the fee gradually reducing to 0.4 per cent for transactions over £100,000. This means that transacting large sums with these brokers could cost you hundreds or even thousands of pounds.
There are some other costs to think about. Some platforms such as AJ Bell Youinvest, EQi, Fidelity Personal Investing and iDealing will charge you a small amount to reinvest your dividends. Barclays Smart Investor, Charles Stanley Direct and Hargreaves Lansdown do not charge for dividend reinvestment. Similarly some platforms, such as AJ Bell Youinvest, Charles Stanley Direct and EQi charge transfer out fees, although most do not. There has been a trend in recent years of platforms abolishing their transfer out fees as these came under scrutiny by the financial regulator for obstructing consumer choice.
Most investors use one platform for their investable assets, so it is important to consider how your investment trust holdings sit within your wider portfolio. If you hold the majority of your assets in open-ended funds, Hargreaves Lansdown can be an expensive option. But if you only hold listed securities, it may be competitively priced.
In studies assessing the importance of different platform features, ease of use regularly comes out on top. Hargreaves Lansdown is by far the biggest DIY platform, with over 40 per cent of the market, and has the resources to provide a very comprehensive service. It has a great deal of research and investment guides available on its website and Holly Mackay, founder of personal website Boring Money, found it to be one of the best platforms for telephone response times in research conducted last year.
However, while Hargreaves has dominated the platform space, rivals such as AJ Bell Youinvest and interactive investor are quickly catching up. Both, for example, are among the platforms with a portfolio x-ray tool which breaks down your investment trust holdings according to asset allocation, geography and valuations – something Hargreaves Lansdown does not do for closed-ended funds.
Safety of assets
Investing involves putting a great deal of trust in the broker you place your money with. Fortunately, when you invest through a platform, financial regulations require that your assets are ring fenced from the broker's assets. If the broker collapses you will still be able to access your money – unless the broker is engaged in fraud, which is unlikely with any of the large platforms given the regulatory framework within which they operate.
As mentioned in the here, although your assets should be protected, the administration process of platforms could take months, so it is likely that there would be a period during which you could not access the money you have with the platform that has collapsed.
You can check the financial strength of a platform by looking at its accounts. Hargreaves Lansdown, for example, holds well over its estimated regulatory requirement of £180m – £319m as of 30 June 2020. AJ Bell Youinvest and IG are also profitable and well capitalised, so look like good places to hold large sums of money.