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20th Feb

The deadline is looming, but which platform for the DIY ISA Investor?


By reading this article you have at least started down the route of becoming a DIY investor – joining the millions of clients disillusioned by the lack of transparency and fat fees charged by many traditional wealth managers and managed financial products or ‘orphaned’ as unprofitable after the changes that came with the Retail Distribution Review (RDR) (In Praise of the Retail Distribution Review – Retail Bond Expert 30thSeptember 2012) 

Suitably educated and with a vast amount of information and support available from sites such as this, the rise of DIY investing has delivered a revolution in the way self-directed investors purchase financial instruments and has rewarded them with huge savings in terms of fees and commissions thereby delivering a big boost to their returns. 

A Number of DIY Investing Platforms

Technology and community engagement is peeling away the mystique that once shrouded the City and added a whiff of leather-scented gravitas to those ‘reassuringly-expensive’ stockbrokers, wealth managers or financial advisers. 

With a computer and the will to take at least partial control of their financial future, investors can use one of a large number of DIY investing platforms with a plethora of information and research available designed to allow them to make informed investment decisions. 

However, before a single stock, share or bond is purchased, choosing the right platform is crucial and the array of different options and changes to the way firms charge has resulted in it being very difficult to make ‘apples and apples’ comparisons between the various options – make the wrong choice for your personal circumstances and the damage to the outcome of your investment strategy can be significant. 

In this article we consider some of the things to think about when choosing a DIY investment platform and compare some of the key providers as well as looking at why you might consider managing your own self-select ISA in the first place. 

If you have just murmured ‘save on fees and make smarter investment decisions’ then you’re in the right frame of mind to be a successful DIY investor.   

Why Should You Consider Investing in an ISA? 

An ISA wrapper allows an investor to shelter up to £11,520 per year (2013/14) free from capital gains tax and whilst it will take the average DIY investor a while to accumulate a pot that will give them a benefit in excess of the standard allowance of £10,900 per year, over time it is possible to accrue a significant sum within an ISA wrapper and some choose it as a portable vehicle for their retirement planning. 

Income from investments is also treated in a tax-friendly way in an ISA - corporate bonds and gilts income is tax-free. 

Dividends and shares income are taxed at 10% at source; basic rate taxpayers will not gain any extra benefit, but higher rate taxpayers do not have to pay any extra tax. 

 In most cases charges for ISA accounts are in line with those for standard dealing accounts and therefore the additional benefits effectively come at no cost to the investor.   

Why are Platform Charges Changing? 

One of the key objectives of RDR was to deliver transparency in terms of pricing in the delivery of financial products and services. 

Previously, many platforms delivered an illusion of free investing by offering customers the chance to use their service with no explicit charges while taking commission back from the annual management charges made on investment funds. 

In many cases this meant free fund dealing and no administration charges, but in return investors would hand over up to 0.75% of their fund investments every year. 

Platform providers often returned some or all of the annual commission to fund investors, but it was unclear exactly how much investors were actually paying to hold their funds Post-RDR platforms can no longer take fund manager fees and instead platforms must charge an explicit amount for their service, with most opting for either a percentage or flat fee based administration charge. 

Gone too, are the ‘initial fees’ on most funds which had previously gobbled up anything up to 5.5% of an investment – an anachronistic ‘signing on fee’ that existed just because it did. DIY platforms are the place to buy, sell and hold all your investments and a tax-efficient ISA wrapper means that the chancellor doesn’t get a look in either. 

Our broker table will give you a flavour of what to look for, but administration charges, dealing fees and any other extra costs should all be carefully considered in the context of what your pattern of investing is likely to be – in and out/buy and hold? 

The tax efficiency of an ISA wrapper is an important concession to the savvy DIY investor as the negative effect of fees and charges can all too easily wipe out the returns from an inspired investment decision. 

The good news for the DIY investor is that fees are generally coming down, but another consideration is to find a platform that will not only accommodate the combination of assets that you hold, but do so in a cost-effective manner. 

Charges may vary for those choosing to hold investment trusts, ETFs, shares and retail bonds, alongside traditional managed funds in the form of OEICs and unit trusts. 

However, the platforms we consider herein are considered to offer an attractive combination of a broad choice of financial instruments as well as competitive pricing.   

Flat Fee or Percentage? 

The new DIY investing platform prices can be chiefly be split into two camps. Some charge a flat administration charge, while others charge a percentage of investors' holdings. 

The former tend to charge for buying and selling investment funds, while the latter tend to have bundled this cost into their admin fees and offer free fund dealing. All charge for buying and selling shares, investment trusts and other products that are not funds, but the dealing fees on these vary from as low as £2.50 to £12.50. 

One way of deciphering between the many DIY platforms is working out the type of investor you want to be - buy and hold investors putting away a large sum of money may benefit from a flat fee rather than percentage-based charging, whereas for those buying and selling regularly dealing charges can soon erode the gain from a flat fee.   

Five Things to Consider When Choosing a Platform   

1. The best option is likely to offer a combination of price and service – quality is only worth paying if you are actually getting it. 

2. What will you invest in - dealing fees for shares, investment trusts, bonds and funds mean you need to think about how you will invest and choose accordingly. 

3. Tools and information - what portfolio building tools and information does a platform have? 

4. Overall charges – the true cost of a platform is a combination of administration fees and dealing charges; consider too things like dividend reinvestment and regular dealing charges. A low admin fee might look good but if you are an active investor who buys and sells a lot, then dealing charges will soon rack up and send costs soaring. 

5. ‘Clean’ funds and new pricing - new commission rules mean a shift to clean funds with lower annual management charges and a new charging structure for platforms by April. Is your platform offering clean funds yet, will they move you over automatically, and what are the plans for charges? Beware signing up to something that has to change its charges within the next few months.   

Cost and quality are the key considerations when selecting a DIY ISA platform and it is important that you find the right combination for your particular investment strategy and personal circumstances; consider what you want to invest in - funds, ETFs, investment trusts etc. and how you want to do so: lump sum, buy-and-hold, regular investing or trading. 

Any homework you do now could pay off in spades and the exit fees attached to unpicking a poor decision could be punishing.   

Here are some to consider:   

Alliance Trust Savings 

Alliance Trust investors pay a flat fee of £22.50 per quarter or £90 per year. 

It charges a flat £12.50 per trade for buying funds, shares, ETFs and investment trusts, but just £1.50 if this is as a regular monthly online direct debit investment; dividend reinvestment costs £5. 

Investors have access to research and tools from Morningstar and in addition to its range of funds it offers access to the full run of investment trusts, shares, ETFs and bonds. 

Alliance Trust is worth considering if you are a buy and hold investor with a large sum invested as it charges a flat fee although it does charges to buy and sell funds.   

Club Finance 

Frequent Trader by Club Finance was launched in 2013 and represented a very attractive proposition to DIY investors. 

In return for an annual fee of at least £100 it cut the cost of buying and selling shares, ETFs, investment trusts and funds for investors to just 50p – including manual dividend reinvestment and regular investing. 

Investors pay an annual fee of 0.35% of their portfolio, with a minimum charge of £25 per three months, or £100 per year. This reduces to 0.3% for investors with more than £100,000, 0.25% above £500,000 and zero above £1m. 

From April 1 2014 share, investment trust and ETF dealing will rise to £2.50, the annual administration fee will fall to a flat 0.24% but with a minimum of £120. 

This will mean an extra cost for anyone with less than £50,000 compared to the current admin charge, but because it has no dealing charge Frequent Trader could be the cheapest option for those with more than £50,000 who buys and sells funds often. 

It is also a very interesting option for those looking to build a shares or investment trust portfolio. At 50p, the set-up cost of a 20 share portfolio would be just £10, compared to £250 at Alliance Trust, or £239 at Hargreaves Lansdown, although from 1st April this will be £50. 

In return for that cheap dealing you must pay a bigger annual charge, but for nimble DIY investors regularly dealing shares and investment trusts this has been outweighed by the super low-cost 50p buying and selling fee. 

For those building a regularly traded share or trust portfolio it will probably still be worth it at £2.50 per deal.  

The Share Centre  

The Share Centre offers investors a full DIY choice in its self select ISA with access to funds, investment trusts, shares, ETFs and bonds with a monthly fee of £4.00 + VAT (£4.80/£57.60) per year. 

Fund, share, ETF, investment trust and bond dealing costs 1 per cent (£7.50 min), or a flat £7.50 with its trader option, which comes with a £24 quarterly charge; regular monthly and dividend reinvestment in funds shares, ETFs, trusts and bonds costs 0.5 per cent (minimum £1). 

The Share Centre's flat administration fee makes it a good option for those with more than modest sums - anyone with just over £12,500 invested will pay less annually here than at Hargreaves Lansdown, although it charges for fund dealing. 

For those with large sums invested it could prove good value compared to percentage-based charges even when dealing fees are taken into account, and it delivers good content and support for investors.   

Hargreaves Lansdown  Vantage 

Hargreaves Lansdown delivers masses of information and support for DIY investors and its new pricing model kicks in on 1st March. 

HL currently discounts initial unit trust and OEIC fund charges down to 0%, most with no annual admin charge; fund dealing is free and share, investment trust, corporate bond and ETF dealing costs £11.95 per trade. 

Investors holding shares, ETFs, investment trusts or other non-commission investments in an ISA pay an annual charge of 0.5% of their value, capped at £45 per year and there are benefits for regular and frequent investments. 

From March 1st, investors will pay a 0.45% fee on their total fund up to £250,000; 0.25% to £1m, 0.1% to £2m and nothing above that andshares and investment trusts will also incur a 0.45% charge, capped at £45.

Hargreaves says it has negotiated reduced annual management charges from fund managers for its investors to save them money. Its popular Wealth 150 list will have average annual charges of 0.65 per cent, with a Wealth 150+ smaller list coming in at 0.54 per cent. 

This will deliver total charges of 1.1 per cent and 0.99 per cent at its higher admin fee level, lower than the current 1.33 per cent average. 

Hargreaves’ new pricing structure will not make it the cheapest around, but it is a comprehensive proposition; it is weighted towards funds but also offers access to investment trusts, ETFs, shares and bonds

iWeb 

iWeb from Halifax sharedealing offers a very competitively priced ISA with access to shares, investment trusts, funds and ETFs, with a £25 one-off set-up charge and no annual or quarterly admin charge beyond that. 

It currently costs just £5 to buy or sell shares, investment trusts or ETFs and fund dealing is currently free; from 31st March it will cost £5 to buy or sell all investments, including all clean funds; there is no regular investment. 

iWeb is keenly priced for those looking to buy investment trusts, shares or ETFs thanks to its low £5 dealing fee and the one-off £25 set-up charge rather than a regular admin fee.   

Interactive Investor 

Interactive Investor charges an admin fee of £20 per quarter (£80 per year) but this is returned in free trades spread evenly over four quarters. 

Standard charges are £10 to buy or sell funds, shares, investment trusts or ETFs, or £1.50 for regular monthly investing. Make ten standard trades in the previous month and a frequent trader rate of £5 kicks in. 

If you were to invest every month by direct debit into four investments you effectively get your £80 back; dividend reinvestment is 1% up to a maximum of £10. 

Interactive Investor currently refunds all trail commission and its share of the 0.25% platform fee an effective 0.64% refund on the 1.5% average annual management charge; it also sells clean funds. 

Interactive Investor offers a wide range of investments, solid research and good content. Its pricing structure is attractive – especially if you ‘earn’ it back through trading – particularly for those with larger sums to invest and its account linking tool means that those who live at the same address can join up their accounts and only pay one admin fee.   

Bestinvest   

Bestinvest ISA investors will pay 0.40% annual charge on their portfolios up to £250,000 and 0.2% above that to £1million; zero beyond £1m. 

Fund dealing is free and standard share and investment trust dealing is cheaper than Fidelity and Hargreaves Lansdown at £7.50. 

BestInvest is a good option for fund investors looking to take advantage of its research and lack of dealing charges and those buying shares, investment trusts and ETFs  benefit from a low £7.50 dealing fee.   

Youinvest   

Youinvest (nee AJ Bell's SIPP Deal) recently rebranded with highly competitive pricing - 0.2% annual administration charge on fund holdings capped at £50 per quarter, or £200 per year. 

Fund dealing is £4.95, while share and investment trust dealing is £9.95 - or £4.95 for those that traded ten times in the previous month; regular investment is £1.50. 

Youinvest delivers a low percentage admin charge that is also capped, but it does have fund dealing charges, albeit lower than some rivals; there is cost effective regular monthly investing in funds, shares and selected investment trusts.     

Charles Stanley Direct   

Broker Charles Stanley came hard at the DIY sector in 2013 with a low 0.25% annual charge on fund holdings, or 0.15% above £500,000. 

There is no charge on investment trust or share holdings if you trade at least six times in the current six-month period; fund dealing is free, but investment trust and share dealing costs £10. 

Active fund investors get a good deal at Charles Stanley with a low annual fee and no buying or selling charges. Those regularly buying and holding investment trusts can also do well thanks to the lack of a fee if you deal six times in six months, but that needs to be weighed up against £10 dealing charges and the lack of a cut-price regular investing option.   

With the April 5th ISA deadline looming there is pressure on investors and platforms alike. DIY investors need to navigate often quite complex rate cards to ensure that they select a broker with the correct combination of service and cost for their requirements and investment profile and platforms need to ensure that their new tariff abides by the letter and the spirit of RDR whilst delivering a competitive proposition in a fast-moving environment. 

It is worth doing your research as a little time and effort now could save much gnashing and wailing, not to mention expense, further down the line – make a sound choice now and concentrate on the really important task of making and preserving long term wealth in your  ISA wrapper.  

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