Choosing an investment platform: A nuts and bolts guide

The act of buying your first index tracker is a big leap of faith (in yourself) and requires considerable courage. I’ve known a fair few would-be lion hearts who were all set to make the leap into DIY passive investing, only to back away because they weren’t sure how to implement their strategy in the real world.

By the real world, of course, we mean the virtual world of execution-only online investment platforms – because this is where DIY investors do their shopping. Read the first post in this series if you want a practical guide on how to buy index trackers.

Once you know where to go and have a shortlist of online brokers or fund supermarkets to choose from, the most important considerations are:

1. Range
2. Cost
3. Picking the right account
4. Service

Range: What’s in stock

With thousands of funds available, not every investment platform will stock all the funds you want. And fund supermarkets generally don’t offer Exchange Traded Funds (ETFs).

If your heart’s set on a particular fund, then check your preferred platform carries it before signing up. Just grab the fund’s ISIN code from the fund provider’s website (you’ll find it on the fund fact sheet) and stick it into the platform’s search engine to be sure they have it.

UK online stockbrokers will offer all the ETFs listed on the London Stock Exchange. If you want to trade say, US-listed ETFs, then call the broker directly to check availability.

Keep fees low

Other than fund choice, the main point of difference between execution-only investment platforms is the amount of fees they can dream up.

Naturally, passive investors like to cut prices like Wembley groundsmen like to cut grass, so beware of:

• Account management charge*
• ISA annual management charge*
• SIPP annual management charge
• Inactivity fees* (if you haven’t traded in a while)
• Dealing fees (don’t pay these on index funds i.e. Unit Trusts and OEICs)
• Dividend reinvestment fees
• Fund switching fees (moving out of one fund to another)
• Fund transfer fees (moving your funds to another platform)
• Cash withdrawal fees*

I’ve asterisked the fees that you shouldn’t have to pay because there are good platforms out there that don’t levy those charges.

Dealing fees will apply to ETFs, but they are easily avoided for index funds – except for the otherwise excellent Vanguard range. The bottom line is that most investment platforms don’t charge dealing fees on non-Vanguard index funds, as they’re paid a commission from the fund’s Total Expense Ratio (TER) instead.

A few other wrinkles to look out for:

• Some brokers will offer a batch of commission-free trades that may make their charges worth paying, if you’re active enough.

• Check that your platform’s list of charges includes VAT. Some do, some don’t.

• Generally, when it comes to charges, it’s better to pay low-ish flat-fees than a percentage nibble of your assets that’ll grow into an almighty chomp as your investments grow over the years.

Choose the right account

Most execution-only platforms offer several different varieties of investment account. It’s worth taking a little time to make sure you select the right one for your needs. Ignoring the siren calls of no-go attractions like spreadbetting, the typical choices passive investors would consider are:

• Share dealing or trading account – To buy shares, ETFs, or investment trusts.

• Fund account – To buy Unit Trusts or OEICs (including index funds).

• Regular investing accounts – Put your contributions on auto-pilot with a monthly direct debit. If you’re buying index funds then you shouldn’t have to pay dealing charges, but do look out for the minimum contribution required per fund. £25 is very good, £50 is standard. If you’re into ETFs then you can’t do better than regular dealing charges of £1.50 per purchase.

• ISA accounts – Will usually be available in the three flavours above, and wrapped in ISA tax repellent. A Funds ISA should enable you to buy index funds without dealing charges, whereas a Self-Select ISA can be packed with ETFs, shares, gilts et al.

• SIPP accounts – Choose your own pension funds.

Note: The actual account terminology will differ, depending on the provider and the range of services they offer.

Once you’ve plumped for an account, it only remains to register it online, hook it up to a bank account, and prime it with some cash for your first investment. Debit card payments, direct debits and BACS transfers are common ways of doing this.

Are you being serviced?

Service is vitally important, of course, but I don’t sweat it for a few reasons.

Firstly, there is little to choose between the different platforms in my experience. Pick any company and you can always find horror stories from ‘Outraged of the Forum’ but that way lies analysis-paralysis.

What I like to do is check the Motley Fool broker board just for the peace of mind that I’m not going with a complete cowboy. Bear in mind that we passive investors are relatively low maintenance and have little need for the gold-plated services demanded by the more shrill voices online.

In practice, online investment platforms offer about the same level of service, diversity, and complexity you might expect from an online bank account. If you can operate one of those and you understand the principles of investing, then you’re in business.

The next part of the puzzle is picking your funds. I’ll take a look at that in a follow-up post.

Take it steady,

The Accumulator

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