Investors will turn to online fund platforms in record numbers this Isa season as they seek to get the best out of their annual tax-free allowance.
However, while a growing number of people are using platforms – also known as fund supermarkets or discount brokers – to buy and hold funds and shares, those transferring their holdings or investing through a platform for the first time are taking a risk if they pile in without doing their homework.
The main platform players – including Hargreaves Lansdown, Bestinvest, Alliance Trust Savings, Interactive Investor and Chelsea Financial – have in recent weeks overhauled their pricing structures.
These changes should improve transparency and make it easier for investors to see what they are paying for. However, they have also made it harder for Isa investors to compare the different offers and work out which is the most suitable for their needs.
And while some investors will save money under the new system of charges, many could end up paying more.
“What should be a simple space is just full of tripwires for investors,” warned Mark Polson, principal at Edinburgh-based consultancy The Lang Cat.
The main choice is between “all-in” providers charging a percentage of your annual investment through the platform – usually between 0.25 and 0.45 per cent – and those who charge flat fees.
“These charge you for activity – so account opening fees, annual fees, dealing fees – but on a fixed charge basis,” said Polson. “The latter is normally cheaper for larger portfolios; the former for smaller ones. And there are hybrids to make it all more difficult.”
There’s no precise rule of thumb, but broadly speaking those with Isa pots below £50,000 are better off with platforms that charge percentage-based (ad valorem) fees. Those with £100,000 or more will typically be wise to consider fixed-fee options, while those with Isas worth between £50,000 and £100,000 have more digging around to do.
There are other charges to look out for too, all of which could eat into your Isa growth. The most obvious are exit fees, which the City regulator is believed to be looking into amid concerns that they are disproportionate to the actual cost of carrying out transfers.
“They range from zero on Fidelity and AXA Self Investor amongst others up to £25 for each fund you hold with Hargreaves Lansdown. Some platforms have a list of extra charges as long as your arm,” said Polson.
Almost eight in ten investors want platforms to be more explicit about their charges, according to new research by Cavendish Online, which found widespread confusion around investment costs.
Ian Williams, managing director of Cavendish Online, said: “It’s clear that despite the best efforts of the RDR most consumers just don’t ‘get’ the costs of investing and when you look at the amount of small print and ‘dark charges’ applied by some platforms it’s easy to see why.
“Punitive transfer charges designed to discourage investors from switching between platforms are a good case in point.”
Picking the right platform is not solely about charges. Equally important is that it offers the assets you want to invest in – such as investments trusts or ‘passive’ funds – and that it’s a service you feel comfortable using.
“Don’t be fooled by a low headline price – or by a high one,” said Polson.
“Dig around on the websites and check you understand what you’re getting yourself into, and if you don’t then walk away. There are providers without these extra charges and for the first-time investor in particular they may be a good option.”