What's the cheapest way to buy funds?
Following the introduction of rules banning commission, we round-up the charges from the market's leading players and help you work out which one will offer you best value for money.
Unlike savings accounts, you have to pay to invest in funds. However, if you know where to look, it is possible to cut the cost of investing and keep more of your returns.
Ironically, buying direct from investment managers is the most expensive route - with most of them levying an initial fee of 5%. However, investment platforms – also known as fund supermarkets - which allow you to buy funds from across the investment universe will waive this fee.
Cheap and convenient
As well as being cheaper, these platforms are also more convenient because they allow you to hold all of your investments in one place, making your portfolio easier to manage and review. And, if you're not sure where or what you want to invest in, they include lots of tools to help you research and choose the most appropriate funds. Some even provide model portfolios for investors that do not want to make the decision themselves. Investments can be held within an Isa if you are looking to save on tax or a Sipps (self-invested personal pension) if they are pension savings.
While these services do allow you to cut the cost of investing they are not free. Until recently, many had no upfront charges, making them appear free, but the platforms had been earning a trail commission on the back of all the funds they had sold – money that was being paid by investors as part of their fund's annual management charge or AMC.
The regulator did not like this approach and through what is known as the Retail Distribution Review, banned the payment of commission. As a result all platforms have until April 2014 to introduce a new up-front charging system, which, the Financial Conduct Authority hopes, will make it easier for investors to compare costs.
At the moment the market is split between platforms that charge a fixed fee and those that charge a percentage of your holdings. Many are moving towards the sale of so-called 'clean' shares for funds where there is a lower AMC that doesn't include any commission payments, but where retail or 'dirty' shares are sold, the commission element of the AMC will have to be rebated back to the investor.
What's the best platform for you?
Just which platform works best for you will ultimately depend on how much money you have, how often you trade and what investments you hold. Confusingly some platforms are negotiating lower AMCs for some funds – while this is great for investors, it does make it harder to compare costs.
So to help you see through the 'mud' we outline the charges for the UK's biggest and most popular platforms. Shoot straight to the bottom to see our colour-coded tables which show you which are the cheapest for Isa investors with accounts worth £10,000, £20,000, £50,000 and £100,000.
For smaller fund investors, analysis from The Lang Cat shows that those platforms charging the lowest percentage-based fees work out the cheapest – both Cavendish and Charles Stanley charge just 0.25%, undercutting the three biggest players: Fidelity, Hargreaves Lansdown and Barclays Stockbrokers. This means a £10,000 investor pays just £25.
Larger investors may do better with a platform charging a flat fee. The cheapest option for an investor with a £100,000 portfolio and making 10 trades a year is Interactive Investor.
For the purposes of this article we have looked at the cost of investing in funds, but if you want to trade shares too you will have to factor those in as well. Thankfully as you usually only pay per trade (with costs falling for more frequent traders) they are – usually- a whole lot easier to compare.
The platforms at a glance
Charges a fee equivalent to 0.35% of holdings up to £250,000. This reduces to 0.2% on portfolios valued between £250,000 and £1 million, effectively meaning if you have more than £1 million invested your costs will be capped at £2,000. There are no additional charges for fund investors; for example, admin or exit fees. Fidelity will also pay exits costs for investors leaving rival providers up to £500. Some AMCs have enhanced discounts.
Charges a fee of 0.45% on portfolios up to £250,000, reducing to 0.25% for portfolios up to £1 million, 0.1% up to £2 million and zero above that. To justify fees that do appear higher than the market average Hargreaves has negotiated lower annual management charges on some of its funds. It claims that the average AMC of its funds will be 0.65% compared to a market average of 0.76%.
A super cheap 27 funds will have an average AMC of 0.54%. This means the exact cost of investing with Hargreaves will depend on the funds selected. Investors should also watch for additional charges for things including exit fees, corporate actions and requests for paper statements.
Charges a fee of 0.4% on funds up to £250,000. Those with funds between £250,000 and £1m pay 0.2%. No fees apply to holdings in excess of £1m. No new fees have been introduced and there are no additional charges for holding specific investments like ETFs and investment trusts. It has negotiated an average annual management charge of 0.66% on its Premier Selection of funds.
Charges a fee of 0.35% (minimum payable £35) on portfolios up to £500,000 with no other transaction charges. However it will levy a £30 annual fee for holding an Isa.
Charges a quarterly fee of £20, but this includes two free fund or share trades in that period. These are charged at £10 to buy and sell thereafter. All fund commission is rebated. Exit fees apply.
Charges 0.25% on all portfolios and no exit charges for funds.
Charles Stanley Direct:
Charges 0.25% on holdings up to £500,000, reducing to 0.15% on funds in excess of that.
Alliance Trust Savings:
£18.75 a quarter plus VAT, plus a £12.50 charge every time you buy a fund. Exit fees apply.
This new market entrant charges a simple and straightforward 0.35% on all portfolios with no additional fees.
The Share Centre:
Fee is £4 a month – or £48 a year- plus VAT. Dealing commission is 1% per trade (minimum £7.50)
AJ Bell, You Invest:
0.2% a year (capped at £200) plus a fee of £4.95 every time you buy a fund online. Exit fees apply.
AXA Self Investor:
There is no charge to invest with AXA until 1st May 2015, after which point a 0.5% fee will apply. There are no exit fees or charges to buy and hold funds.
|The Share Centre||£157.60||£229.00||£259.00||£304.00|
|Chelsea Financial Services||£60.00||£120.00||£300.00||£600.00|
(Source: The Lang Cat)
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.