DIY passive investors have a new option when it comes to getting their mitts on ultra-low cost Vanguard index funds – Bestinvest’s select service.
And because Bestinvest don’t charge dealing fees on OEIC funds, Vanguard index trackers are now a plausible option for drip-feeding investors on a budget.
Previously the best choice for Vanguard index funds was Alliance Trust or Sippdeal. But those companies charge dealing fees on every purchase and sale, which puts a big dent in the return of small investors who make monthly contributions to take advantage of pound-cost averaging.
By going the Bestinvest route, you can now invest your monthly sum in a diversified selection of Vanguard index funds as long as you make at least the minimum fund contribution of £100 (which is very high as it goes).
There’s always a but…
But the reason a mass decamp to Bestinvest is NOT a no-brainer is because it levies a charge known as the custody fee.
If an investor holds any funds from a firm that doesn’t pay Bestinvest commission, then Bestinvest charges the investor a custody fee of £12.50 + VAT per quarter (that’s £15 per quarter), and double that for a SIPP.
Bad news, but at least it’s more transparent than when a portion of the fund’s management charges are siphoned off without the investor having any idea how much commission they are paying out to the platform.
Vanguard doesn’t pay commission, so holding any number of its index funds with Bestinvest amounts to an annual management charge on your account of £60, or £120 for a SIPP.
The upshot is that if you want Vanguard index funds then your ideal investment platform depends on how often you trade.
Let’s compare the options.
Which Stocks and shares ISA?
| Bestinvest | Sippdeal | Alliance Trust | |
| AMC* | £60 | £50 | £48 |
| Dealing fee | £0 | £9.95 | £12.50 |
| Regular investing | n/a | n/a | £1.50 |
*Alliance Trust levy an AMC while Sippdeal and Bestinvest impose a custody fee for non-commission paying funds i.e. Vanguard. As far as we’re concerned, these mechanisms amount to the same thing: an AMC.
Bestinvest’s annual management charge (AMC) is £12 more per year than Alliance Trust’s. If you used Alliance Trust’s regular investing service (£1.50 a pop) then you could make 7 trades over the course of the year before annual costs were equal. That’s barely than a trade every 2 months, so it doesn’t take long before Bestinvest becomes the more cost-effective option for a drip-feeder.
If you wanted to sell a fund to rebalance, that would cost you £12.50 through Alliance Trust, so a single sale would wipe out its AMC cost advantage.
Which SIPP?
| Bestinvest | Sippdeal | Alliance Trust | |
| AMC | £120 | £50 | £162 |
| Dealing fee | £0 | £9.95 | £12.50 |
| Regular investing | n/a | n/a | £1.50 |
We can write-off the Alliance Trust SIPP straightaway as it charges a greater AMC than Bestinvest and it is saddled with dealing fees. Sippdeal offers more resistance this time and you could make seven trades in the year before Bestinvest comes out ahead.
Which standard investment account?
| Bestinvest | Sippdeal | Alliance Trust | |
| AMC | £60 | £50 | £48 |
| Dealing fee | £0 | £9.95 | £12.50 |
| Regular investing | n/a | n/a | £1.50 |
The deal is exactly the same as with ISAs. Alliance Trust wins up until the point you’ve made 7 regular monthly purchases.
Spreadsheets at dawn
Of course, the permutations are potentially endless and torturous. But at least now there are a few different Vanguard DIY options available to investors depending on their circumstances.
Paying £60 per annum for an ISA is not to be sniffed at by a small investor. That would slice 1% off a £6,000 investment pot, so you may well be better off with a no-charge ISA and a non-Vanguard fund portfolio if you’re not investing for the very long haul.
There is another… Since I wrote this article, Hargreaves Lansdown now offer Vanguard funds too. Again, there’s no clear winner, the best choice depends on how many funds you hold, in which account, and how often you trade. See here for the update.
Take it steady,
The Accumulator
Or is an option to forget about drip-feeding and save the money in high-interest account and then invest a lump sum?
May be less tortuous (or ‘torturous’, if you like…) 🙂
Isn’t the other side of this how much the lower TER of Vanguard would save you relative to say the TER of the HSBC alternatives?
Eating a 1% hit on your £6k is a pretty rough deal. F’rinstance the HSBC FTAS is listed with a 0.27% TER, assuming the extreme case of Vanguard having a 0% TER implies you’d need to be holding about 18k worth before it makes it worth holding Vanguard on a fee-charging platform as opposed to HSBC equivalents on a fee-free platform like iii which I hold some of these in.
That’s not unreasonable – after all it’s just two years’ worth of ISA contributions, but saving £10k p.a. is still a decent size ask for most of us 🙂
@Moneyman, surely if you save and lump sum it aren’t you losing some of the pound cost averaging, particularly in times of high volatility like now? There’s a case to be made for reducing the frequency of your purchases to bimonthly perhaps, but any less frequently and you run the risk of missing valleys…?
@Moneyman
I think Alliance give you one free trade as part of the AMC on their ISA. So an annual lump sum wouldn’t attract a dealing charge
@ Moneyman – the permutations certainly felt torturous to me.
@ Ermine – agreed that’s why I mentioned the non-Vanguard option, linking to the Slow and Steady portfolio that’s stuff with HSBC index funds.
Re: pound-cost averaging, from what I’ve read there is little practical difference between monthly contributions and investing annual lump sums, though I think psychologically I could have all kinds of issues casting a large lump sum into the stock market furnace as opposed to the automatic monthly cut that’s taken now.
Good to see Vanguard popping up on a new platform, even if it’s not quite the deal small investors have been waiting for. As someone just about to start their first passive portfolio, I’d kill for a glimpse of the post-RDR world. I really don’t want to set up an account now and then have to transfer out in a year or two years’ time, because the transfer fees (assuming they remain, though I understand part of the RDR’s purpose is to make it easier for people to transfer) are pretty punitive – way more than you can save by wise choice of a platform.
I’ve emailed SippDeal this morning and they have told me that Vanguard funds are not available for regular investing. This was their response
“Please be advised that the Vanguard funds are not part of the regular investment service. Therefore, if you wish to place a trade, it would be at the standard dealing charges of £9.95 online or £29.95 over the phone”
A response I received to a question on another topic on your website and the article above illustrate that regular investing is available. Has anybody been able to successfully set up Vanguard funds as a regular investment at SippDeal?
Thanks in advance for your help
Good digging Bopper. Here’s what Sippdeals website says under charges:
Regular investing
If you regularly invest in any of the funds available as indicated in the Sippdeal funds list – nil
If you regularly invest in any of the other investments available – £1.50
So you’d think that Vanguard funds would trade for £1.50 a go as they don’t appear in the Sippdeal funds list but do count as ‘other investments available’.
However I’ve since found another Sippdeal list that covers all their regular investments and Vanguard isn’t on it: http://www.sippdeal.co.uk/Resources/Content/PDF/SD_Regular_investment_service.pdf
Sippdeal sure like lists. Still, you can invest for £1.50 a trade using Alliance Trust’s regular investment service. That I know for sure.
Thanks for coming back to me. Thought I’d missed something on the SippDeal website! Looks like its Best Invest as the best way of drip feeding into a SIPP for Vanguard funds. Thanks for your help and the excellent thought provoking articles
I don’t understand where you got the AMC for BestInvest as they say they have no AMC for ISA’s and SIPPS. Am I reading something wrong?
Another blow today for index investors is HL are going to charge £2 a month to hold any HSBC index fund – hmm that’s over 2% per year if you have about £1000 in a fund!
@Geo — That’s terrible news, do you have a link please? I have a HSBC tracker in a SIPP with Hargreaves Lansdown.
@ Geo – see the asterisked text under the first table: *Alliance Trust levy an AMC while Sippdeal and Bestinvest impose a custody fee for non-commission paying funds i.e. Vanguard. As far as we’re concerned, these mechanisms amount to the same thing: an AMC.
Re: HSBC that really is a blow. They’ve previously levied a 0.5% fee on some index trackers (but not HSBC) because they’re obviously upset about the lack of commission. Looks like their closing the HSBC loophole now. Take a look at iii instead. No extra charges there.
HL are now offering vanguard funds, with annual (platform) fee of £24 per fund.
For a lump sum annual investment of 4K before April 2012 for Vanguard lifestrategy-please suggest the best choice at present.HL/BI/AT or Sippdeal?
Regards
@ Latestarter – see here: http://monevator.com/2011/12/13/hargreaves-lansdown-vanguard-funds/
Assuming you’re investing in an ISA or SIPP account then HL is likely to be your winner.
Yes -have done that now.Thank you accumulator
From 1 August 2012, ATS has increased its admin fee for ISAs from £30 per year to £48 (£12 per quarter). The same fee now applies on investment accounts, which previously had no admin fee. It will now rarely be the best choice for holding Vanguard funds.
Thanks Ivan (good name), I need to update this post. With the more expensive annual fee Alliance Trust beats Best Invest only if you can make 7 or fewer regular investment purchases a year in a Stocks & Shares ISA or standard account and don’t sell anything. So Best Invest looks the better bet in terms of flexibility.
Another superb article. Great comparison. However I came to know that BestInvest has not come out with their post RDR policy. Should be out by Dec. Any guesses on which of these platforms wil introduce a percentage based fee ? Apparently only Alliance Trust has come out and openly said that they will only charge a flat dealing fee.
I wish to build a simple portfolio of vanguard index funds and BestInvest sounds too good to be true. No gealing charges ! Great customer service as well. But I wonder if they will slap a percentage fee and then I would have to pay transfer-out charges to transfer to another provider.
My other problem is that I am considering relocating to India but still have my funds invested in uk. BestInvest is pretty cool with non-residents but Alliance trust is putting all kinds of restrictions, and also being pretty inconsistent so it has been a frustrating experience.
Any comments ? Thanks !
Hi Blue,
Sippdeal and iii are also flat rate while TD Direct and Charles Stanley are the main percentage merchants.
http://monevator.com/compare-uk-cheapest-online-brokers/
The best site I’ve seen that deals with more complicated international situations like yours is The International Investor. Well worth a rummage.
Thanks accumulator
> Sippdeal and iii are also flat rate
As of today, yes, but I highly doubt if BestInvest select Service or SippDeal will stay flat fee forever. especially after RDR. The platform makes peanuts in revenue from a passive investor with a handful of index funds. I feel almost certain they will introduce a percentage-of-assets-based fee. Maybe I should wait till December, but my fear is that the platform will do this after I become non-resident (say next year) and then I will be screwed.
Apparently Alliance Trust is the only provider who has unequivocallly stated that they will continue to go be flat-fee, so credit to them for that.
Now, What is my objective here ? : I wish to buy and hold a small portfolio of Vanguard index funds in dealing account, ISA, SIPP, and most importantly, be allowed to “maintain” that, even after I become non-resident for few years. By “maintain” I mean rebalancing. So I want to be able to buy additional units of or sell units of Vanguard funds that I already owned from my UK residency days. To buy, obviously I would need money. This money can come from dividends generated by the funds I own (income units), or by selling some of the units of the funds I own, or by adding cash (in case of dealing account). Now I checked with Vanguard UK and they have absolutely no issues with non residents continuing to hold and purchase additional units of their funds via platforms such as these. It is only these jokers (platforms) that like making life difficult. Interestingly, if I went to a fee based advisor and a wrap platform like Transact, then again, these issues dont arise. But then my expenses would mount. Oh, and another way to get around this is LifeStrategy funds, but that wont suit me, because stocks and bonds will be mixed in a single fund and it wont be tax efficient.
so the issue is with these el-cheapo platforms (except bestibvest) who dont seem to have a clue and want to clamp down on non residents for no reason whatsoever.
iii : wont suit non residents, I remember checking this a long time ago and they wanted me to pack my bags and leave, in case I became non resident.
sippdeal : They are ok with non residents continuing to keep SIPP and ISA, but I have to close the dealing account.
bestinvest : No issues at all with non residents, complete flexibility (buy / sell whatever mutual fund I want), no dealing fee, sounds way too good to be true. The rep I spoke to also expressed curiosity and interest in the size of my portfolio. I am therefore willing to bet that they will introduce percentage based fee. Otherwise it simply doesnt add up. They are not a charity.
which brings me to Alliance Trust. Their message has been inconsistent, and a bit frustrating, let me explain : I checked with them in 2010, they said once you become non resident, you can sell mutual funds but you cannot buy additional units or any new mutual fund but you are allowed to buy ETFs and shares. This makes rebalancing using mutual funds slightly tricky. I escalated this to their CEO, and got a call from their Head of Compliance and he agreed to my request (the rebalancing thing I mentioned above) because I was only interested in Vanguard funds. He spoke to a client rep in Alliance Trust whom I will name R. So, in 2010, he, R and I agreed in writing (email) and I thanked them because it was sorted. Last month tho’ I thought I would check again (been 3 years) and this time, one lady whom I will call J, writes back to me a copy/paste response saying “No, once you become non-resident, you cant buy mutual funds”. But I said : “Hold on a sec there, We went thru this 3 years ago”. J says : “Rules may have changed, also mutual fund providers dont like non reidents. Jog on”. I checked with Vanguard UK again, and then shot back : “J, What rule has changed, can you be specific, and btw, Vanguard UK havent changed their tules”. No reply. I went back to R and appealed. she had conveniently forgotten everything. More copy/paste template rejection responses from R as well. Again I escalated to Head of Compliance and he comes back to me and says “Yeah, we can do that, dont worry about it, no problem at all”. Again R comes into the picture last week and says “yes but, no but, yes but, You will be allowed to buy additional units but you can finance that only by selling a few units of another fund you own, not with new cash in the dealing account”. Whiskey Tango Foxtrot ?! I have appealed again, but no reply, I have jyst about had enough. May be I can get around this nonsense with ETFs, but I dont know what to believe now. Maybe once I become non resident, they will come up with a new rule that says when I login to their website, my mouse must be frozen. “Our terms and conditions states that customer’s mouse must be frozen”. Or how about “our state of the art software system will prevent the customer from moving the mouse and there is nothing we can do about it. Our brains dont work anymore, we cannot think for ourselves and our computers are our actual bosses”. whatever …
Can you please provide a link to the international investor website ?
That sounds like a real trial. Would certainly be enough to make me reach for the cyanide capsules. Here’s the link: http://the-international-investor.com/
FWIW, Sippdeal like Alliance Trust seem to compensate for flat fees with trading charges, but you’re right, no guarantees with any of them.
ETFs do seem to travel more easily. I’m currently researching how to buy US listed trackers. I can’t buy overseas mutual funds but I can buy ETFs. I’m not in the same situation as you of course (I’m a UK resident trying to buy US products from a UK broker) but it could be that you’re coming a cropper in the same regulatory minefield as me when it comes to funds.
Thanks for the link and the points you made.
government regulation is only part of it – the cheap platforms in UK do not seem to be aware of all the rules.
on the US side of things, the problem is due to government regulation, consequences of FATCA (foreign accounts tax compliance act). IRS in the US wants foreign banks, brokerages around the world to divulge all info about American customers, and therefore these foreign governments would also want reciprocation, i.e they would want all information about their nationals holding accounts in American banks/brokerages. The consequence of this is that the individual banks and brokerages would kick out foreigners holding accounts with them, as it is too much work for them. I used to live in the US and opened several bank and brokerage accounts during my stay. I dont have a green card or US citizenship and now live in the UK. Until recently I could operate these US accounts with full freedom, but obviously I am unable to open new US bank accounts, brokerage accounts etc. However, out of the blue, last year, TD Ameritrade US asked me to close my account and leave, simply because I was non-resident. ING Direct bank did the same. But my Minneapolis credit union bank, ETrade, Vanguard US, and Fidelity (IRA) have not made any fuss so far. I have complete freedom in terms of what funds/ETFs etc I can buy etc. So the American position is clear : Either I get full freedom as a customer, or they ask me to get out. And I am not even a US citizen so I cant really complain.
But here in UK, there seems quite a bit of inconsistency among providers. If I went to a fee-based adviser and use a wrap provider like Transact, then, even after I become non-UK-resident, there would be no issues at all. That’s because these guys have the full knowledge. They deal with no-nonsense wealthy people so they have to be extremely professional. Vanguard UK itself has no problems with non-residents holding and buying additional units of their funds, but the platforms are clueless. Part of the problem is that UK mutual funds are meant for UK residents and the managers of many of the funds dont like non-residents, especially those non-residents who live in the US because they dont want to come under the regulation of SEC etc. But given that I am only interested in Vanguard UK funds and I dont intend to relocate to the USA, should not be a problem for me. I have tried to explain this in vain, to Alliance Trust. So, Alliance Trust promises me flat-fees, but makes life difficult by insisting that I cannot buy additional units of Vanguard funds with new money in dealing account. Bestinvest gives me full freedom but cannot guarantee flat-fees. choice between devil and the deep blue sea.
Alliance Trust says “due to potential tax implications ATS has a policy of not allowing any non-UK resident to add new money to buy mutual funds “. What bloody tax implications ? as far as I know, Tax issue arises when you sell, not when you buy. Consider the 4 possible options below after I become non-resident :
(1) selling units of a Vanguard mutual fund A that I already own and buy additional units of Vanguard mutual fund B that I already own.
(2) I hold income units which generates cash dividend and I use this money to purchase additional units of Vanguard mutual fund that I already own.
(3) I add new money by UK bank cheque, and attempt to purchase additional units of Vanguard mutual fund that I already own.
(4) I add new money by UK bank cheque, and purchase UK listed shares or UK listed ETF.
so, they have been quiet about (2) so far. They have allowed (1) and (4) but forbidden (3) due to “tax implications”. Call me crazy, but can anyone see any special “tax consequences” for (3) alone that does not apply to (1) and (4) ? Beats me.
Just tried to top up an initial investment with BESTINVEST for a Vanguard Lifestrategy fund and have been told that any new purchase to drip feed the original will have the “initial charge” of 0.24% applied.
Can’t say I understand how it can be free to deal in funds on their site with a recurring “initial charge” applied on every purchase.
I must admit to being new to investing but this doesn’t seem fair to me so I wanted to check with some else, is this normal?
I complained but haven’t heard back yet.
@ John – that initial charge is payable by anyone investing in a LifeStrategy fund with any broker. Best Invest’s webpage says 0 initial charge (last time I looked) but that’s because they don’t levy the initial charge. I think they could be much clearer about this to say the least. The Vanguard charge is a dilution levy and it means that each investor pays the costs incurred when the fund buys new securities on their behalf. It’s meant to prevent short-term trading and is actually a good thing for buy n hold investors who would otherwise pay excessively for investors who churn. Non Vanguard tracker funds don’t tend to ask for a dilution levy but you’ll pay the same costs all the same either via the OCF or the tracking error.
Hi
I don’t mind the dilution levy. My objection is they want to apply it to each additional drip, which would make them pretty expensive drips in my book.
John
Hi
Just got my official letter back regarding my complaint
“regardless of the method of which purchases of units are made into a fund, whether it is by ad hoc lump sum or invested as part of a regular monthly instruction if new units are purchased the fund manager will levy the initial fee.”
So a permanently reoccurring initial fee. I asked at Alliance and they don’t do this so I may change. I’d be interested if any of your other readers have run into this problem. I’ll take it to the ombudsmen as I understood it to be a one off dilution levy charge as you described. I’ll let you know how I get on.
Thanks
John
John