Thursday saw the Monevator inbox swell up like a Spanish housing bubble. Email after email came in from dedicated readers horrified by the price bomb dropped on their heads by Interactive Investor (the discount broker commonly known as iii).
In one fell swoop, iii swung from being one of the cheapest execution-only brokers around into being about as suitable for small passive investors as mood-altering dance music concealing subliminal BUY / SELL messages.
Let’s quickly recap on what iii has done and why, look at how bad that actually is, and then you can consider some F U iii responses here.
What has iii done?
The investor anguish is palpable, not far off Charlton Heston’s fist-pounding “God damn you all to hell” moment in Planet of the Apes. From 1 July, iii is introducing the following price changes:
£20 quarterly fee
- This is an £80 per year flat-rate charge for holding an ISA or trading account.
- Only one fee is paid per customer even if you have multiple ISA and trading accounts.
- Family members can link their accounts so that one fee covers the lot.
- New customers won’t pay this fee if they invest using the regular monthly scheme and have contributed less than £5,000.1
- iii is reportedly refusing to apply this waiver to customers who joined before May 30 2012.
£10 trading fee for all funds
- Or £1.50 per fund purchase through the regular monthly investment scheme.
- Trading fees are deducted from your £20 quarterly fee. i.e. You get two £10 trades for free per quarter.
100% trail commission rebates
- …but this makes little difference to passive investors who have already chosen low TER funds that pay next to nothing in trail commission.
- You’ll need about £80K in your portfolio for rebates to outweigh the new quarterly fees if you use the kind of index funds recommended in our passive Slow and Steady portfolio.
Previously, iii did not charge a quarterly fee and you could trade funds for free.
Ah, the good old days.
How bad is it?
Frankly, it’s pretty grim. Flat-rate charges always hit small investors hardest. Here’s how much you’ll lose from your return if you pay £80 in extra management charges per year:
| Portfolio size (£) | Cost of £80 charge (%) |
| 2,000 | 4 |
| 4,000 | 2 |
| 8,000 | 1 |
| 16,000 | 0.5 |
| 32,000 | 0.25 |
| 64,000 | 0.125 |
| 80,000 | 0.1 |
The UK stock market has historically offered a real return of 5% per year. A loss of 1% in fees would rob you of 20% of that gain.
That’s why fees matter, even if the percentage cost seems trivial. The loss is potentially huge for current iii customers who are struggling to build up their investments, and there are plenty of Monevator readers in that boat.
If you hold a Slow & Steady style portfolio then you’ll dilute the above costs by around 0.13% a year, thanks to trail commission rebates.2
Then we get to the impact of trading fees
The Slow & Steady portfolio holds a diversified suite of seven index funds that could previously be traded for free with iii.
Contributing to each fund every quarter would cost an additional £50, according to iii’s new pricing plan.
That’s £200 per year – without even thinking about rebalancing sell trades.
If we switched to iii’s monthly investment scheme, we would make £10.50 worth of purchases every month. That would mean paying out £11.50 every quarter on top of the management fee, or an extra £34.50 per year (again without rebalancing).
It’s all far too much to give away. I wouldn’t now give iii a second look unless I had a portfolio worth over £32,000. Even then, there are plenty of better alternatives available.
Infuriatingly, iii has given customers just a month to react to these sweeping changes. I’m sure that fulfills the requirements of its terms and conditions, but it hardly smacks of a firm that cares for its customers. And neither does the disingenuous justification that coats iii’s explanatory email like a layer of slime.
You can read the letter and enjoy it being taken apart by one outraged customer at the Simple Living In Suffolk blog.
We all know that brokers love churn but iii’s claim that its move is in the interests of investors, who it ‘believes’ should ‘actively manage’ their portfolios, feels to me about as sincere as Peter Mandelson thanking his aunt for a Christmas present of Argyle socks.
Why is this happening?
It seems likely that charging higher fees is less to do with an ingenious attempt to help customers ‘engage’ than it is connected to the Retail Distribution Review (RDR).
The RDR is the FSA’s regulatory tsunami that’s been rumbling towards the financial services sector for a couple of years. It finally hits on 1 January, 2013.
A major part of the RDR brief is that product costs should be transparent to investors. That means financial advisors will no longer be able to collect trail commission paid for by investors through fund TERs that see us skip home thinking we somehow got the nice man’s advice for free.
Critically, the FSA has not yet decided whether to ban the trousering of trail commission by execution-only platforms like discount brokers and fund supermarkets. That decision is due before the end of 2012.
Currently, execution-only platforms hoover up trail commission from funds, even though they dispense no advice. That enables the platform to turn a profit while leaving us in a blissful state of ignorance about the true cost of its services.
Brokers like iii and Hargreaves Lansdown appear to have decided it’s game over for trail commission and we might as well all get used to it.
Sadly while this financial glasnost makes a lot of sense, it bizarrely works against passive investors who know how to take on the system.
We aren’t about to get a windfall from active funds full of trail commission fat. Instead, we’re getting stung by the disinfectant of financial reform – just as somebody who’s inoculated themselves against bank overdrafts and loans will when free banking finally comes to an end.
Still, there are plenty of other platforms that are keeping their powder dry, or reshuffling their fees in a more passive investor-friendly way than iii. Take a look at your options here.
Take it steady,
The Accumulator
So does this mean that etfs on iii are relatively more attractive than funds now? As they used to be charged a fee anyway. Given that some etfs have lower ters than funds (I believe the vanguard etfs are quite cheap), could this be seen as an argument to switch to etfs?
Looking forward to the article on different providers tomorrow! If possible could you also cover the impact of potential switching costs, which I think iii mentioned on their faq page but did not provide details on?
Looking forward to the next article… but how can one predict what broker is best now if they’re yet to make and fee structuring changes? I thought Hargreaves Lansdown looked good but from what I read on this site, they have hefty fees. I don’t trust smaller less-known sites. How about Motley Fool or perhaps TDWaterhouse?
Thanks for this TA – I was considering iii at the beginning of the tax year as I was transferring ISAs anyway – their platform was tempting and they had the additional carrot of a £5,100 lottery for new subscribers. Glad I didn’t go for it!
Look forward to tomorrow’s post. Do you think Vanguard brokers are likely to change, given they all charge annual fees anyway? Like many people I suspect, I’ll try and wait it out until next year to consider my options, when everyone has shown their post-RDR hand.
@Gman — I’m minded to believe that all platforms will include some form of passive-unfriendly fee or another sooner or later. Now they’re losing their fat commissions from active funds, they’re going to look to make the money up somewhere else. That said, T.A. has shown above that the fees are very meaningful for investors with smaller-sized portfolios, so I don’t fault anyone for taking the time to try and stay ahead of the charges as the dominoes fall. BTW, the Motley Fool is just a white-label version of Halifax Sharedealing, although it may have a different suite of charges – not sure.
@Matthew — You’ll have to do the sums, and be sure to think about how your portfolio will grow, too, over the years ahead.
@Rob — I think there’s something to be said for waiting for the dust to settle, too. On the other hand, if you’re engaged investor like many who read Monevator, why not switch if it saves you some moolah? 🙂
So far the only change I’m aware of for TDDirect (who used to be TDWaterhouse) is the following:
“From 1st July 2012 any Trail Commission received by us from the Fund Manager will be rebated in full to your appropriate account as cash. The first rebates will be made on or after 31st December 2012.
We are also introducing a new simple Platform Fee to our Rates & Charges that will be applied to your fund holding to cover our distribution costs; this is charged as follows:
Funds paying Trail Commission of 0.5% or more annually 0.35%
Funds paying Trail Commission of less than 0.5% annually Nil”
No mention of trading fees and their annual fee is zero if you have more than about £5k. (Normal trades are 12.50 & regular investing £1.50 or again, free for funds.)
Note that they don’t have vanguard OEICs but there’s nothing stopping you getting the ETFs.
This is excellent IMO. In fact, so good that I’m a little worried about possible surprises!
great article accumulator
“God damn you all to hell” moment in Planet of the Apes.
everyone is taking HL lead on platform fees
Tricky situation now – i only recently started an ISA with ii, investing mainly in HSBC trackers, have been buying in recent mkt weakness.
I’ve decided to use/invest my whole ISA allocation before the new fees start, then maybe wait another quarter, and hopefully if the mkt rises up, i’ll sell out and then transfer out as cash to another provider.
I did consider iii a few months back when I needed an additional broker to spread my risk of fraud etc. This is something I do regularly; every ten years or so 🙂
I noticed a clause about the fact they could sell the business or parts of the business including business assets to a third party, and that the list of client details was one of these assets. However there was no clause to bind any new owner to the same client data protection as offered by iii elsewhere in the terms (such a clause is normally included, well it is for at least three other brokers). Sorry I don’t remember the exact wording. I questioned it with iii & they confirmed it was just bad wording, but would not confirm this in writing. As a consequence I had to set up an account elsewhere. I was not impressed by iii’s (lack of) attitude towards making an effort to help the customer.
I also found out that they changed platforms a while ago, and the number of complaints went up. I think the terms may have been changed at that time. I guess if anyone is not happy with them, this might be a good opportunity to move on.
@ Matthew – I don’t think it’s an argument for ETFs as there are still plenty of cheaper brokers and fund supermarkets out there, who will also provide ETFs into the bargain. More in tomorrow’s piece.
@ Gman – you can’t, and indeed any platform can change their terms given whatever period of notice resides in the small print. However, some platforms have already realigned in the face of RDR and provide a better deal than iii.
@ Rob – I’m pretty sure the availability of Vanguard will spread as platforms move away from the trail commission model. It’s because Vanguard don’t pay trail commission (because they consider it opaque) that they’re not very popular with the majority of platforms.
@ David – the business models have to change but not everyone is responding in a way that unfairly penalises small investors as Greg shows.
@ Paul R – if you choose an in specie transfer you don’t have to leave the market.
@ Loads – good sleuthing!
Hi Greg,
1. I, too, have been reading that document announcing the new charges for TD Direct Investing.
2. It’s commendable that the company alerts everyone, including potential customers (cf. Interactive Investor), of its charges as of next month. And from a link on their home page – if in the bottom, right-hand corner 🙂
“@ Paul R – if you choose an in specie transfer you don’t have to leave the market. ”
True – but would still have to pay the £15 transfer out per fund fee, which i am loathed to pay.
Like quite a few others I’m a bit up the creek with iii now. Was just starting to build my passive portfolio with a number of trackers and a drip feed approach. The recent market dips were helping me out too. However the dips have now become an enemy because if I sell everything I’ll lose plenty. But the steady drip feed of small amounts would seem a waste of time now. Perhaps I could use my 20 pound per quarter to buy HYP style stocks that are going cheap. There seem to be a few around at the moment. The hope would be that the dividends and gentle upswing (when it eventually comes) would at least keep the demon of ii’s fees at bay whilst I decide what to do next. (any advice?)
Crazy isn’t it, governments and brokers talk so much about how important it is for people to take control of their financial future but make it virtually impossible for small people to do so!
Very underhand of ii to give people only 1 month to make their plans.
I would note that TD do charge a rip off rate of conversion when buying things in other currencies. (2% each way for any sensible sized amount.)
While one could have some cash in $ in their normal trading account, you can’t have non GBP cash in an ISA.
Apart from that, and their slightly buggy interface (the handy X-Ray feature used to crash a lot and the regular investment interface didn’t show many of the funds until recently) I’m very satisfied with them.
As TA says, perhaps they will offer the Vanguard OEICs at some point. If they did, and didn’t increase their fees (fingers crossed) then I think they would be untouchable. (Note that for a few OEICs, eg. the Ruffer ones, they don’t refund all of the initial charge which HL do but for almost all other funds they discount the ISC by 100%.)
It seems everyone stings you if you want to leave them though! This is something I’m pleased the Government sorted out for NEST pensions.
@ Paul R – the £15 transfer fee would be nothing next to missing out on a big rally. Of course, you could miss a crash too, but on balance the market rises more often than it falls.
@ Dean – there’s no need to sell up and why buy HYP stocks if you weren’t going to before? iii haven’t done anything that suddenly makes that the logical solution. Full range of options tomorrow but sitting tight for a few months isn’t going to do any major damage.
Seems like iii have waived the transfer out fees for one customer:
http://forums.moneysavingexpert.com/showthread.php?t=3990039&highlight=iii&page=15
He/she was a new customer and complained on a miss selling line.
F.
Just out of interest, how long would it normally take from clicking ‘sell’ on an index tracker, to the money being credited into your bank account.
I’m in the fortunate(???) position to have less that the years S&S ISA allowance in my iii ISA, and was considering simply selling everything, and topping up my HL SIPP.
I realise I could miss a rally, but if it’s simply a matter of 5 days, it’s a chance I’m willing to take (I suppose to reduce risk, I could split the sales over a few weeks).
I too will be crystallising small losses, though as the cash will be going (almost) straight back into new funds, I don’t really see this as being a problem.
@Paul R I guess one option is to rebalance down to just one fund(say a FTSE tracker), move to a new platform and then rebalance again back to your old holdings(assuming your new platform allows you to rebalance for free!) That way you only pay £15, the downside is you lose out on about 4-6 weeks of diversification.
So we’ve got until 1st of June, else take the first £20 hit. Will be interesting to see the article tomorrow, especially covering the brokers who’ve already made their changes and are ‘better’/cheaper etc. To be honest my portfolio size is only of the order of £10k (lost SO much money trading AIM, don’t do it!!).. any gains will never be enough for an ISA. And most brokers charge for ISAs… so I may just get a normal shares account (obviously I wasn’t buying AIM stocks in an ISA!)
I think the key for me is to buy a normal trading account. Hargreaves Lansdown and Motley Fool both have no charges (YET, anyway) for the normal share dealing account. Perhaps this is the trick? Unless you expect to make massive gains every year…..
@TI – I would indeed switch to same some moolah if I could be sure the new platform was post-RDR. My current platform charges £25/fund transfer fee which for someone who likes diversification on a relatively small portfolio is a big hit – even more so if I had to transfer twice.
Incidentally, when transferring an ISA do you have to pay per fund AND closure fees? Not impressed if so! I would much rather the RDR would limit these fees to cost than worrying about trail commission, so that we can have real competition and low impediment to transferring. If it worked with credit card and current account charges, would it be possible to complain that transfer out & closure fees are unfair/disproportionate?
Why does bait’n’switch from an internet only fund administrator surprise anyone?
So where is everybody thinking of moving their portfolio?
Rather than transfer for £15 per fund I was just going to sell and rebuy at the new site. Anyone have any advice as to which broker is likely to be the most value for money and dependable?
Rather than transfer for £15 per fund I was just going to sell and rebuy at the new site.
Just a reminder for those who are not aware — if you sell funds/shares in an ISA and withdraw the money, it loses its ISA wrapped status. If you then want to put it into a new ISA, that comes out of your ISA allocation for the current year.
In other words if you’ve built up a few years of ISA allocations and you intend to switch to a new broker, its imperative that you *transfer* the ISA from one broker to another, not sell up, withdraw, and reinvest. Officially transferring the ISA broker-to-broker retains the ISA wrapped status of your money.
I thought that as part of RDR, providers were supposed to be allowing people to move accounts easily without being penalised /charged.
Does anyone know if you close your iii account you can then start contributing to a new provider; or do the rules about only being able contribute to one provider a tax year stand in some weird way? I think that the FSA should change this so people can play a new fee charging market better. You can switch your bank account whenever you want.
Like many others I’m not sure when I’ll move as its from the fire into a smoking frying pan. Who knows what HL will do when their fat commissions drop off for instance, more platform fees? I think any provider who doesn’t rebate all the commission could add more charges.
The financial stability of iii, as highlighted is interesting, although does anyone know for a fact that any of the other providers is in better shape?
Look forward to part 2 of this article today.
@Geo
Look at Alliance Trust Savings if you want a very stable, unleveraged counterparty
ATS is the subsidiary of a LSE listed investment trust with lots of marketable assets and very little
(However, they will still use other financial institutions as custodians etc.)
Also, Alliance Trust have changed (i.e. jacked up) their charging structure in the last couple of years and will no doubt do so again when they scent the chance
Well Selftrade, who have been mentioned on the moneysavingexpert forum about this subject as one of the best alternatives are owned by a larger company in turn are majority owned by Society General – not sure that’s good or not with a Euro Implosion coming, but then what financial institution is 😉
http://en.wikipedia.org/wiki/Boursorama
@Neverland – yep i know ATS. My iii is mainly HYP shares and ITs on a long term buy/hold basis so I’m looking for a what ii was, long term low cost, regular purchase option, cheap divi purchase scenario. I don’t mind a small fee but £80 is a bit too much maybe, we’ll see.
Hi all,
I attempted to make a spreadsheet to try and figure out which alternative platform may be worth switching to. It may help you.
https://docs.google.com/spreadsheet/ccc?key=0AhPotLU0DadMdEY4dl8xb21wQ0dCNDVWZ2FQZnNfc0E#gid=0
re: “Family members can link their accounts so that one fee covers the lot.”
So if husband and wife link ISAs, does their FSCS £50k cover drop — from 2 x £50k to 1 x £50k?
Hi all, here’s the piece on best F U iii options as I see it: http://monevator.com/no-fee-discount-broker-options
If you listen to MoneyBox on Radio 4 iPlayer for 9th or 10th of June. They have an interview with a representative from III because of so many complaints and he confirmed that they had now agreed to WAIVER FEES for people who transferring to other broking firms and not requiring cash or a share certificate.
They claim that the firm you transfer to actually pay the firm.
As an add-on to the above – you also need to say that you are closing your account. To recap – if you complete transfer forms to transfer to another provider and also state that you want to close your account – then you will not be charged any fees.
Apologies for the ignorance, but should I transfer my modest isa with ii (£7k, split with a mix of funds and individual equities) to say TD Waterhouse, in practice, am I able to do this in a way that doesn’t result in this process triggering a sale and then buy-back of individual holdings on my new isa provider? Not surprisingly, given the wider market conditions, some of my funds are showing at a loss at the moment.
Thanks in advance
Hi Rich, you can avoid triggering a sale by asking for an ‘in-specie transfer’ see here for more: http://monevator.com/no-fee-discount-broker-options/
Hello, since discovering this great site a few months back i opened up an ISA with iii and set up regular payment of £40 per month, i have now built up the grand sum of £153 investing in the HSBC FTSE All Share in the ISA, what is best action to take for such a small holding, close it down or transfer to another broker? I wish to carry on doing exactly the same investments for the moment what other broker is currently best to transfer into? Thanks!
Hi Stu, this is the piece for you. It’s all about your next best option: http://monevator.com/no-fee-discount-broker-options/
Thanks for the compliment. Really helps.
I make good use of the regular investment feature. If I was previously spending ~£80 on trading costs (e.g. a buy each quarter, and two regular investments each month) then my understanding of the iii charge is that I won’t see a significant difference. It seems to be a “minimum trading charge” of £20 each quarter- easier to stomach than a straight cost.
I was always the annoyed by the fees charged by Halifax. I wanted to move to iii due to the smaller fees but it wasn’t worth doing due to the switching costs. After reading this, I’m not so bothered about the Halifax fees anymore.
I always thought iii was the best value stock ISA out there. What do you think the best account is currently?
@ Ash – Here’s a piece all about that: http://monevator.com/no-fee-discount-broker-options/
re iii linking: I’ve just discovered that one fee does not cover both family accounts – only one can get the £20 back. The other pays £10 a deal.