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Do you want your broker to be clean or dirty?

It’s a question of cost control and is the main issue fund-toting investors must resolve now that sweet-smelling RDR is here to turn the financial advice industry whiter-than-white.

The question comes down to this:

  • Are you better off with a portfolio full of investments that siphon off mucky ol’ commission to your broker from the fund fees?
  • Or should you go for clean class funds that are superficially cheaper (because they don’t pay commission) but instead force brokers to cake on extra fees to wash their face?

Clean class costs vs retail fund costs

The short answer…

The likely answer is that investors with small portfolios are better off with brokers that still provide old-style commission funded services. If you pick your platform wisely then you can avoid flat-rate charges such as platform fees and dealing costs that take a disproportionate chunk out of a smaller portfolio.

In contrast, investors incubating a large clutch of assets can more easily absorb flat-rate costs. But they should steer clear of percentage fees that swell along with the portfolio.

So how small is small and how large is large?

Let’s find out.

The long answer…

Step 1 is to find out the total Ongoing Charge Figure (OCF) of your portfolio.

Just multiply the OCF of each fund by its percentage allocation in your portfolio. Then add up your results to clock your portfolio’s total OCF.

For example:

Fund Allocation OCF Weighted OCF
Total Market tracker 70% 0.5% 0.7 x 0.5 = 0.35%
Property tracker 20% 0.4% 0.2 x 0.4 = 0.08%
Gilts tracker 10% 0.2% 0.1 x 0.2 = 0.02%
Total Portfolio OCF 0.45%

If you get commission rebates from your existing broker, don’t forget to subtract those from your fund OCFs.

Now match up the total OCF of your dirty portfolio against the cost of its clean class alternative.

For example, the total OCF of Monevator’s Slow and Steady passive portfolio is 0.37% if using dirty funds.

The clean class version has a total OCF of 0.24%.1

Multiply your total OCF by the size of your portfolio to find out how much you’re paying in charges.

For example:

  • £10,000 x 0.0037 = £37 (annual cost of dirty fund portfolio).
  • £10,000 x 0.0024 = £24 (annual cost of clean fund portfolio).

Thirteen pounds. That’s all the OCF cost savings on a portfolio of this size amount to for being squeaky clean. If your prospective broker is going to charge you more than that in additional fees, then go down the dirty route.

And there isn’t a post-RDR broker out there who is going to charge you less than £13. So much for RDR helping small investors.

Obviously, if the dirty portfolio is subject to other costs then you should count those too, although that won’t be a concern if you choose a fund supermarket like Cavendish Online.

The breakeven point

So what does it take for the clean class to win? How large does your portfolio need to be?

Continuing the example above…

The difference in OCF cost between a dirty and clean portfolio is 0.13% (0.37% – 0.24%).

We’re looking for the point at which that 0.13% difference is worth more to us than the annual costs we’d incur with a broker selling clean funds.

The broker BestInvest charges £60 a year in custody fees to own clean funds. There are no dealing fees for funds to worry about, which keeps things nice and simple.

The calculation is:

£60 / 0.0013 (or 0.13%) = £46,154

That’s the breakeven point at which the cost of a dirty fund portfolio costing 0.37% a year equals the cost of a clean portfolio costing 0.24% plus £60 in broker charges.

i.e.

£46,154 x 0.37% = £170.77 total cost

£46,154 x 0.24% = £110.77 + £60 = £170.77 total cost

If your portfolio is bigger than the breakeven then you’re better off in clean class funds.

Make sure you count any annual fees, platform fees, dealing charges and other costs that are relevant to you (perhaps dividend reinvestment charges) and subtract any rebates. Remember to add the cost of multiple accounts if you hold them.

If you invest regularly then you should be able to accurately estimate your annual dealing fees, or else use last year’s pattern. You may also want to estimate your portfolio’s size once you’ve dripped another year’s worth of cash into it.

In for a percentage

Some post-RDR brokers charge a percentage management fee. For example, Charles Stanley Direct charges 0.25%.

That’s pretty simple. Just add that number on to your clean portfolio’s total OCF to see if the total cost is cheaper than the dirty version.

For example, an unbundled 0.24% + 0.25% is never going to be beat the bundled 0.37% fee for the dirty Slow & Steady portfolio.

To compare a flat rate fee against a percentage fee then use the following calculation:

Total costs of broker 12 divided by broker 2 percentage rate

= breakeven point

I’m outta here

If you do decide to switch then make sure you’re aware of the pitfalls of being out of the market if you cash out. Also note that your existing execution-only service may charge you exit fees to leave.

Some investors will be experiencing compulsory conversion to clean class funds, as their broker weans themselves off their commission skag.

But it is uncertain whether the commission-only escape route will remain open for long.

The FSA will rule later in the year on whether execution-only platforms will remain exempt from the RDR ban on payment by commission.

The fact that many firms haven’t gone clean is proof positive that the decision could go either way. Until then, where there’s muck there’s brass.

Take it steady,

The Accumulator

  1. You can now get a clean version of the L&G Global Emerging Markets tracker. []
  2. Minus any flat rate costs of broker 2. []

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{ 31 comments… add one }
  • 1 gadgetmind February 12, 2013, 11:31 am

    I do hold some strategic bond funds with BestInvest Select and must admit that I hadn’t spotted that they had clean alternatives as I mainly use Vanguard trackers, ITs and ETFs on that platform. I’ll have a furtle!

  • 2 Snowman February 12, 2013, 12:10 pm

    That is an excellent guide to the calculations.

    Important as it is to do the calculations, the real difficulty is that you can only use calculations like these for short term planning.

    The longer term problem is not knowing what the cheapest platform charges will settle out to be in the future. What will be the cheapest percentage option? What will be the cheapest flat fee option? Will dealing fees for funds become the norm? What will be the end result platform charge and methodology on your current platform? How easy will it be to exit that platform if they move to a flat fee charging model when you are going to be better off with a percentage model or vice versa?

    Historically the platforms have been marketing instruments for the fund managers and the platforms aren’t keen to give up their huge marketing payments.

    The worst case end scenario is that a situation develops where all platforms charge considerably more than the cost of running the platform (allowing for a small profit) and barriers to entry are put in the way of platforms trying to come in and undercut on platform charges.

    If you look at the traditional costs of buying, selling and holding shares where there is often no holding fee, just buying and selling costs, you realise how dysfunctional the platform market is and how un-necessarily high platform charges are becoming.

    One interesting development is the initiative to use CREST to settle funds that some fund managers are looking to sign up to

    http://citywire.co.uk/money/mandg-to-usher-in-electronic-settlement-of-funds/a657102

    Really that is what healthy competition between platforms should be all about, simplifying administration and settlement to bring costs down for consumers. The fear is that won’t happen and the platform market will just be an overpriced cartel making it very difficult for smaller investors to create a diversified portfolio that isn’t going to get battered by charges.

    Sorry, I am digressing from the subject so I’ll stop there.

  • 3 Simon February 12, 2013, 1:42 pm

    > “there isn’t a post-RDR broker out there who is going to charge you less than £13”

    I have a handful of the clean HSBC funds through TD Direct, and pay a grand total of £0 for them, though who knows how long that’ll last.

  • 4 Jumper February 12, 2013, 5:34 pm

    > I have a handful of the clean HSBC funds through TD Direct, and pay a grand total of £0 for them, though who knows how long that’ll last.

    Until August.

    http://www.tddirectinvesting.co.uk/investment-choices/funds-unit-trusts-and-oeics/rdr-important-info

    “… we will not be charging a platform fee on clean funds until August 2013. The fee we will introduce at this time will be 0.35%.”

  • 5 Alex February 12, 2013, 9:42 pm

    Great headline – close to Valentine’s Day, too.

  • 6 Luke February 13, 2013, 12:44 pm

    I would like it to be less blimmin’ complicated!

  • 7 mark February 13, 2013, 7:24 pm

    Just tried to buy the clean version of the HSBC trackers on Bestinvest.

    Found them OK but it would not let me deal them.

  • 8 Andy February 15, 2013, 2:30 pm

    > I have a handful of the clean HSBC funds through TD Direct, and pay a grand total of £0 for them, though who knows how long that’ll last.

    Until August.

    http://www.tddirectinvesting.co.uk/investment-choices/funds-unit-trusts-and-oeics/rdr-important-info

    “… we will not be charging a platform fee on clean funds until August 2013. The fee we will introduce at this time will be 0.35%.”

    Just checked with TD Direct and they advised that they will be charging a 0.35% platform charge on clean and ‘dirty’ funds from August 2013 (including the HSBC & Vanguard index tracker funds).

  • 9 Dan February 15, 2013, 3:48 pm

    Random question but what do you use to create the great blackboard and chalk style illustrations that front many of your posts? Looking for something similar but cant find anything that looks as good

  • 10 The Accumulator February 15, 2013, 5:00 pm

    @ Dan- it’s called simple diagrams

  • 11 Dan February 15, 2013, 5:03 pm

    @ The Accumulator – Many thanks

  • 12 Trium February 15, 2013, 6:08 pm

    Good article – just to pick two small nits:

    1. I suppose we should expect a passive investor’s take on this blog, but breakevens for active funds are lower (in some cases zero) since there is a bigger difference in charges between clean and legacy classes.

    2. I realise you were directly comparing all-clean/all-legacy portfolios, but on BestInvest if you have any shares, bonds, ETFs or other non-commission securities in the account you are already paying the £60 custody fee. In that situation, the incremental cost of holding clean funds would be zero, though unlike mark above I cannot find the HSBC class C trackers on BestInvest.

    Incidentally, HSBC’s platform is supposedly introducing compulsory clean-only classes as and when these become available, together with a 0.39% platform fee from May. However, the first flush of clean-onlys appears to focus mainly on those low-charging funds where the customer loses out. Invesco Perpetual High Income, for example, is still offered at 1.69% TER (with a kick-back for HSBC) despite a no-trail version at 1.19% having been available since 2007. Hmph.

  • 13 NaeClue February 15, 2013, 7:11 pm

    I am confused now. I thought that RDR banned kickbacks. Is it true then that online platforms still get kickbacks? What stupidity is this?

    Is there some kind of consultation process going on so that we mere retail investors can voice our opinions and influence the FSAs decision?

  • 14 The Accumulator February 16, 2013, 9:00 am

    Correct, execution-only services can still take commission. The FSA will rule on this at some point this year. I guess the thinking is that there’s no bias in execution-only as the punter is not being steered by a silver-tongued ‘advisor’. Of course, we all know that the way information is presented on websites has a massive influence on the actions of user.
    I’m still ambivalent about the effect of RDR however, as small passive investors lose out.

  • 15 The Investor February 16, 2013, 9:41 am

    I know RDR is frustrating for the hardcore DIY passive crew, but I think we have to take the bigger picture.

    Yes, cunning Stainless Steel Rat investors will find it hard to duck every last charge like before, when intermediaries didn’t bother to chase the pennies from running passive funds because they were rolling in the wages of promoting active sin.

    But the truth is even the ongoing costs you now can’t duck out of will become puny pretty quickly if you’re saving a reasonable amount.

    In the meantime, millions of our fellow citizens will be alerted to the high fees of active management, even if they never fully grasp the big kickbacks they were also paying to fund advisers in the pre-RDR days. The crippling impact of kickbacks and commission from advice (“Yes, I advise you put money into this expensive pseudo-bond that pays me 7% for my time Sir” will be largely banished forever. That’s a long way from Hargreaves Lansdown charging £2 to hold a tracker fund.

    Seriously, when I know people aren’t going to pay 5% upfront and 2% say forever because of an early encounter with some self-interested financial adviser, I find it hard to get upset about small passive investors having to stick a few tenners in the till to keep the wheels turning.

  • 16 The Accumulator February 16, 2013, 10:11 am

    That wasn’t my point at all. I am hardly going to set the chance of saving a few bob against vulnerable old ladies falling into the hands of vampire commission-suckers.
    My point is I am ambivalent about the effects of RDR on execution-only firms. Yes, I can see the advantages of transparency, yes, I fear that the industry is devising ways to recoup the money anyway, yes, I’m upset that the net effect is to increase the cost on the ideal form of investing for many, even though that hurdle can be cleared over time.
    It will also be interesting to see the effects of RDR if the predictions of the withdrawal of advice to low wealth customers bear out.

  • 17 The Investor February 16, 2013, 11:06 am

    Fair enough. I just think there’s a mild hacked off tone creeping into comments by passive investors across this site and others that RDR has somehow been a bad thing.

    RDR is a very very good thing, IMHO.

  • 18 Jumper February 16, 2013, 6:13 pm

    > I just think there’s a mild hacked off tone creeping into comments…

    As one of the hacked off, I’d just like to make it clear that I’m not averse to ALL charges. Although I’ve mostly dodged them in the past, I have no problem with a reasonable “custody” charge for paperwork, record keeping, and so on. HL’s £2/quarter/fund or Bestinvest’s £60/year are fine for Vanguard funds.

    But percentages, and in particular platform charges more than double that of the funds themselves, are outrageous.

  • 19 gadgetmind February 16, 2013, 7:25 pm

    I hate percentage charges as I really can’t see why it costs them more for me to have £50k in funds than £5k or even £1k.

    I can live with fixed annual charges (they have to pay their web monkeys somehow) and just about with HL’s per tracker charge, but anything that takes my overall fees (TER+platform+whatever) over 0.5% is unacceptable IMO.

    I think we’re going to see fewer platforms in the future with the winner being those with most customers. HL seem to realise this and are currently doing a classic “land grab”.

  • 20 The Investor February 16, 2013, 8:02 pm

    As The Accumulator lays out in his maths above, it clearly comes down to size of pot which way you lean.

    At the very other end of the spectrum, I had to alert my sister today to the news (on Radio 4 MoneyBox) that F&C is going to charge £25 a year as a fee for Child Trust Funds, as her daughters’ only has a few hundred quid in it. By 18 she could have it whittled to zero!

    F&C had already written to her. Tellingly she was furious at first when she read the letter, but then realised it was “only £25 a year”. She thought it was monthly at a glance. She’s no muppet in general life, but this is the level of care that most people will apply to their personal finances, and it’s why I think RDR is a huge net gain. It’s also why I fear making too negative a noise over 0.1% here or there risks turning off the people who need to get the passive index message most.

    The fact is loads more people are going to be running their money far, far more cheaply in five years time then five years ago.

    Obviously it’s completely annoying to face something like that £25 charge. I totally get that.

    I originally put her onto this as it was a way of holding some interesting investment trusts at a discount for free. Now we’ll probably move her cash to a simple stakeholder CTF charging 1.5% or similar, which is obviously awful but far better than a flat fee for such tiny sums.

    So I do understand how annoying these charges are, and I appreciate some want to drill down every last pound. Good for them! 🙂 But when it comes to RDR there’s a bigger wrong being righted, as I think we all appreciate.

  • 21 Jumper February 16, 2013, 9:48 pm

    > So I do understand how annoying these charges are, and I appreciate some want to drill down every last pound. Good for them!

    If I had to swallow TD’s new 0.35% fee my portfolio costs would increase by over £2k/year. That’s not just “drilling down to every last pound”, and I rather resent your implication that £2k/year is small change.

    Clearly I won’t pay that charge. But to avoid it I will be forced to move stuff around brokers, incurring non-negligible transfer charges and in the worst case perhaps also a CGT liability. Under the circumstances I don’t think that my feeling a tad “hacked off” is unjustified.

  • 22 The Investor February 17, 2013, 12:57 am

    @Jumper — I don’t think there’s much utility in us taking this in an ad hominem direction. My comments about RDR weren’t directed at your specific situation, and even if they were you hadn’t shared any information about your portfolio size or the potential hit as far as I’m aware, so resenting the fact that I can divine neither from a couple of comments on a website seems rather curious.

    My original point is that RDR has made many more people aware of where they are paying what costs. Many more people will see a percentage figure and apply it to an absolute number and realise that together they amount to a meaningful hit, and then take action. This article and others elsewhere helps show them the way.

    Pre-RDR, many (most?) would have been none the wiser.

    Clearly if those two variables produces a £2K hit, you’re going to do something about it. I agree entirely, that’s not small change. For someone with a £10m portfolio it’d be a £35K toll. For someone with £1K, it’d be £35.

    That the costs are unwrapped in the sunlight is the point as far as my defence of RDR is concerned, not the absolute sums for any particular reader.

    As you say, you clearly won’t pay the £2K. I don’t know your specific situation and have no business or desire to, but speaking generally, many passive investors facing a £2K hit from that 0.35% charge could likely bring it down by a factor of ten or more, depending on their specific needs. Hurrah!

    I appreciate there’s some turbulence moving stuff around, but let’s not lose sight of the bigger picture, that’s all I’m saying here. The idea that one could run a multiple six figure portfolio for the price of a quality newspaper subscription would have been the stuff of deranged fantasy even 20 years ago. No 2% toll, say, or 5% upfront charge. People have been regularly paying both, on top of other fees, for decades.

    Never been a better time to be a private investor.

    Three cheers for RDR if it helps do away with charges like that — not to mention the terrible ‘advice’ the whole sanctioned kickback structure encouraged.

    The fact that we can now see what we’re paying and move if we want to is a boon, not a burden.

  • 23 gadgetmind February 17, 2013, 11:14 am

    I also think RDR is a good thing and if I have to move stuff when it comes along, so be it.

    You can hold unwrapped investments very cheaply but sadly are forced to used platforms for ISAs and SIPPs. Their charges are (within reason) pretty tolerable given the advantages of these two tax wrappers.

  • 24 Jumper February 17, 2013, 3:37 pm

    Again, to be clear I don’t think RDR is bad. Not at all. The uncertainty and instability with platforms during the transition is bad, though.

    ISAs and SIPPs don’t bother me as much as my unwrapped funds with built in capital gains do. My other fear is that smaller platforms will be squeezed out of the market, leaving only large providers with percentage-based fees that dwarf the underlying tracker fund charges. An effective cartel of platforms would be a retrograde step for all investors.

    These days the must-have platform comparison tool appears to be a fully functional crystal ball…

  • 25 Snowman February 18, 2013, 11:19 am

    Noticed that Fidelity Fundsnetwork have an interesting £75 cashback per £10,000 transferred ISA offer on until 30th April 2013.

    So there is an option to transfer/re-register retail HSBC trackers there. You have to keep funds with them 18 months. You have to factor in using jumper’s functional crystal ball what they will do about RDR but the cashback gives you a bit of cash to exit after 18 months if need be with some of the cashback hopefully in pocket. So even if they say introduce a 0.25% platform fee in say November and introduce say £20 per fund re-registration away fees the cashback may cover the amount of these extra costs.

  • 26 The Investor February 18, 2013, 11:33 am

    @Jumper — Agreed, that’d be most handy!

  • 27 simond March 11, 2013, 1:48 pm

    I’m confused! Now that TD have a 0.35% platform fee, where’s the best place to invest in Vanguard funds? 50K investment for the long term.

    Any advice appreciated!

  • 28 Schemo February 9, 2014, 3:56 pm

    So we can see that for smaller portfolios you are cheaper investing in funds on a platform like TD Direct that incurs a percentage charge rather than dealing costs.
    But what should you do when your portfolio grows past the point it is advantageous.
    You’ll be holding funds that incur an annual charge larger than the equivalent ETF dealing charges.. what do you do about this exactly?

  • 29 The Accumulator February 9, 2014, 7:11 pm

    Well, you either live with it, or you switch to a more suitable broker, probably a fixed fee one:
    http://monevator.com/how-to-transfer-a-stocks-and-shares-isa/

  • 30 Schemo February 9, 2014, 8:22 pm

    Thank you.
    Makes sense. And within the same broker, if I’d chosen to invest in funds to start with with their 0.35% platform fee, I guess when I get to the point the platform fees are more than regular dealing charges for ETFs (which have no platform fee), then I can just switch to buying ETFs instead?
    I was going to ask whether it’d be sensible to sell the whole fund and buy ETFs at that point, but I think I’ve found the answer in here: http://monevator.com/switch-to-cheaper-index-funds/

  • 31 The Accumulator February 9, 2014, 10:28 pm

    Yes, assuming the ETFs are like for like, and don’t cost a lot more in terms of OCF and dealing fees than they would in the next best alternative.

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