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Bailing out of Interactive Investor: No-fee discount broker options

The impact of Interactive Investor’s fee hikes felt akin to a great disturbance in the Force. As if millions (give or take) of Monevator voices cried out in great annoyance…

As well they might. Discount broker Interactive Investor (iii) had previously been our go-to no-fee broker. Now it wants to bombard us with account management charges and dealing fees that put a big brake on the returns of passive investors with small portfolios.

You can read the what, why, and how bad here. This post is all about alternative no-fee discount broker options. The community is frothing with anger and people want away from iii. So where to go?

The good old days of fee-free accounts – that let you buy and sell index funds without paying a brass wazoo – are still in full swing, although complications abound.

Should I stay or should I go

Top pick: TD Direct Investing

There’s a lot to like here.

No management fee…

  • … if you have a regular investment ISA or trading account.
  • …or you have over £5,100 in a trading ISA.
  • …or you have over £7,500 in a trading account (or you have made a single trade in the previous quarter).
  • Otherwise you’ll be charged £36 per year for the trading ISA and £15 per quarter for the trading account.

You don’t even need to trade every month to qualify for a regular investment ISA, so this is a great option for most passive investors.

No fund trading fees

  • Unit Trusts and OEICs (i.e. all index funds) trade gratis.
  • Exchange Traded Funds (ETFs) trade at £12.50, or can be bought for £1.50 through the regular investment scheme.

Retail Distribution Review (RDR) adapted

  • The main reason I favour TD Direct is because it’s already made its RDR move.
  • The platform fee of 0.35% is only charged if your fund pays over 0.5% trail commission. Otherwise the charge is zero.

I have yet to find an index fund that pays over 0.4% trail commission. Most pay 0.1% to 0.3%, including all the funds in The Slow and Steady portfolio.

As a result, passive investors shouldn’t get whacked for a platform fee with TD Direct. What’s more, you should get a little back, as all trail commission will now be rebated. And if you’re guiltily hiding a few active funds that do pay over the 0.5% threshold then your trail commission rebate will more than cover the 0.35% platform fee.

While there’s no guarantee that things won’t change, it’s worth underlining that TD Direct has decided to rebate 100% of trail commission even before the FSA has made a final decision on whether execution-only platforms can keep it or not.

That means TD Direct should be prepared if the FSA decides to end trail commission. And its solution is far more favourable to small investors than either iii or Hargreaves Lansdown has managed.

Should you want to leave though, TD will transfer out the entire account for £55.

Selftrade

Selftrade is another good choice, because it has also recently changed its pricing structure. The following package applies from 1 July.

No management fee

  • Beware there is an inactivity fee of £10.50 per quarter.
  • It’s easily avoided if you make a single trade (even reinvesting a dividend) in the previous quarter.

No fund trading fees

  • Funds are free to buy – although they cost £12.50 to sell.
  • ETFs can also be bought for £1.50 in the regular investment scheme.
  • You could argue the selling price is actually a barrier to churn, putting investors off whimsical performance chasing.

Exit fee cashback

  • Selftrade will pay up to £100 per account you transfer to it (maxing out at £300). That could make a swift exit from iii relatively pain-free, as its transfer fees are £15 per investment.

Transfer fees (to leave) at Selftrade are £15 per investment. There’s no mention of trail commission rebates and it doesn’t peddle any of that platform fee / custody fee aggro.

iWeb

iWeb is the best ‘clean’ discount broker choice available. There’s no management fee excuse-me of any sort. The only snag is that it hasn’t responded to RDR yet.

  • No management fee.
  • No fund-dealing fee – ETFs are £10 to trade, regular investment is £2.
  • No platform fee, no custody fee.
  • No trail commission rebate.
  • Transfers out – £25 per investment.

This is execution-only as it used to be. A no-frills service, but that’s what you’re paying for.

Cavendish Online

I tend to be drawn to discount brokers over fund supermarkets because they generally offer ETFs as well as index funds.

If you’re not bothered about ETFs, then plenty of fund supermarkets – such as Cavendish Online – offer no-fee accounts where you can trade funds without charge.

Most offer some level of trail commission rebate, although they may yet have to change their terms pending the outcome of RDR.

Note that Cavendish doesn’t have the L&G All Stocks Gilt Index fund. Replace it with the HSBC UK Gilt index fund instead.

Hargreaves Lansdown

If all this fee-fighting faff makes you think, ‘Soddit, I just want life to be simple,’ then you can buy a complete, diversified, off-the-shelf portfolio in the shape of a Vanguard LifeStrategy fund.

You’ll pay a platform fee for the fund of £24 per year in a Hargreaves Lansdown ISA, and that’s it (other than the fund’s TER et cetera). Trading is free and Vanguard will even rebalance your fund-of-funds automatically.

But if you want to build your own portfolio of Vanguard funds then your best option may be to bring Alliance Trust or Bestinvest into play.

A major downside of Hargreaves Lansdown is that it levies an extra 0.5% charge (max £45) if you hold ETFs, bonds, shares, or investment trusts in an ISA. This charge does not apply to the Fund & Share account.

The upside is that the platform fee is Hargreaves Lansdown‘s response to RDR.

Bestinvest

Bestinvest is interesting because it enables you to avoid fees initially, but offers the option to add Vanguard funds later, if you’re prepared to accept a custody charge. But keep in mind that Bestinvest hasn’t reacted to RDR yet.

No management fee

  • If you buy from an approved list of funds that stump up trail commission.
  • The entire Slow & Steady portfolio is on this list, bar the L&G All Stocks Gilt Index fund. Replace it with HSBC UK Gilt Index instead.
  • The custody charge is £15 per quarter if you buy any Vanguard funds, other funds that don’t pay enough trail commission, ETFs, or shares.

No fund trading fees

  • ETFs trade at £12.50 and there’s no mention of regular investing.

Exit fee cashback

  • Bestinvest will give you a golden hello worth up to £500 to cover your exit fees from another platform.

Bestinvest doesn’t muck about with trail commission rebates. Instead it offers cashback through a loyalty scheme. El cheapo passive investors don’t count as loyal citizens of the Bestinvest kingdom.

Transfer fees are £25 per investment plus £60 to close an ISA account.

Should you move?

Switching platforms is not something to be done lightly. The costs and hassle mount up.

It would cost £105 to get the seven-fund Slow & Steady portfolio out of iii, due to its transfer fee of £15 per investment. That’s versus £80 to stay put for a year, plus any trading charges incurred on top of that.

UPDATE: iii waive transfer fees. Since this post was written, it looks like iii’s customer service department has been napalmed by angry soon-to-be-ex customers as they’ve decided to drop their transfer fees, if you ring 0845 200 3637 by 31 July 2012.

Needless to say, virtually all platforms charge zip to transfer in.

If you do go for it then make sure you ask for an in specie transfer (sometimes known as reregistration).

That way your funds aren’t caught out of the market for any period, and you don’t miss the massive rally that’s bound to be just around the corner if you cash out.

You’ll also retain the goodness of your ISA wrapper that you’d lose if you manually sold up to avoid transfer fees.

But the big question is whether it’s worth moving before the FSA has decided to ban trail commission or not. See here for a fuller discussion of this issue.

That decision is due before the end of 2012, and may yet shift the landscape for execution-only platforms running to catch up.

At worst, iii customers will pay £40 in management charges during that period, so it could be worth waiting to see where the chips fall rather than constantly chasing after the last free platform in town.

Don’t want to wait? Then platforms that already charge a fee and rebate 100% of trail commission seem best positioned to deal with the post-RDR world without more major upheaval. Ask your choice if it will cover your transfer fees away from iii.

In the meantime, you could join the ranks of angry Interactive Investor customers pressing the company to waive its fees.1

With any luck, if the FSA does ban trail commission then our fund TERs will deflate a bit, and we’ll still be able to find a good quality platform that doesn’t penalise small investors with infernal flat-rate fees.

Until then…

Take it steady,

The Accumulator

  1. Look out for forum member Fagun’s complaint template in particular. []

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{ 170 comments… add one }
  • 150 ivanopinion November 30, 2012, 6:25 pm

    I hate to come across all doom and gloom, but the TD Direct situation with Vanguard seems too good to be true. I think anyone switching to them for this purpose should do so in the expectation that TD Direct are likely to hike their fees at some point, because at present they are buying and selling investors’ Vanguard holdings and taking care of custody and record-keeping and earning absolutely nothing. That can’t be sustainable.

    However, if you are happy to go through the hassle of transferring out if necessary, the transfer fee is not too bad, so it might be worth taking the risk on how long you get to benefit from the current lack of charges.

  • 151 The Accumulator December 1, 2012, 7:53 pm

    I think that’s fair comment, Ivan. It’s either a loss-leader or a tactical move as customers migrate during RDR. Interestingly the same thing is going on in the States with Charles Schwab essentially providing brokerage services for free. The Investor linked to a Larry Swedroe interview that talked about the zero fee phenomenon in last week’s Weekend Reading. According to Larry, Schwab operate a cross-sell model, hoping to snare you with credit cards and bank accounts etc. I’m not saying this is the TD plan, I just find it an interesting parallel.

  • 152 The Accumulator December 13, 2012, 7:10 pm

    This just in from TD Investing on charges (I’ve edited the full spiel so you get it fat free):

    Updates to our Rates and Charges that will come into effect from 1st February 2013.

    Our Trading Account Management Fee remains £12.50 plus VAT per quarter. The fee will not be charged if you:

    Have a funds (Unit Trusts/OEICs) valuation of £10,000 or more in your portfolio or

    Have a SIPP or ISA linked to your Trading Account.

    We will continue to waive this fee if you trade once or more per quarter. We will also continue to waive the fee based on your individual portfolio valuation but the minimum required is increasing from £7,500 to £15,000.

    No changes to our ISA and SIPP fees

    Our ISA Administration Fee remains unchanged and continues to be waived if you:

    Have a balance in your ISA of £5,100 or more or

    Have a regular investing facility set up on the ISA.

    Our TD SIPP Administration Fee remains unchanged at 0.25% of the value of the SIPP every 6 months (subject to a maximum of £100).

    Online funds trades (Unit Trusts/OEICs) remain free of trading commission however funds trades by telephone will now be charged at £40 per trade.

    New funds with no trail commission

    Our fund pricing has not changed and we are pleased to introduce a new class of funds with no trail commission included in the Annual Management Charge.

  • 153 Cisnes January 13, 2013, 9:58 pm

    TD Direct introducing a 0.35% platform fee for clean funds as from August 2013.

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

  • 154 The Accumulator January 13, 2013, 10:56 pm

    Thanks for the tip-off, Cisnes. That ends the mystery of how TD Direct can do it. They can’t.

    Breakevens on 0.35% platform fee:

    Alliance Trust @ £48 annual charge = £13,714

    iii @ £80 annual charge = £22,857

    HL @ £24 annual charge (1 fund portfolio) = £6857

    Portfolios values below these breakeven rates are better off at TD (in a regular trading ISA).

    There are dealing fees to account for at iii and Alliance Trust too. Estimate your likely annual dealing fees and add them to the annual charge / platform fee.

    Then the calculation is: Total costs / 0.0035 = £breakeven

  • 155 Geo January 14, 2013, 10:28 am

    Interesting….. but presumably this doesn’t apply to standard funds, so the non-clean HSBC funds? So, as TD list both of these the HSBC 100 standard would be 0.27% minus any trail rebate, the ‘clean’ c class would be 0.1% plus 0.35% = 0.45%. That sounds weird but this is how i read the new structure. Also there would be no difference to vanguard as its a non clean fund…?

  • 156 ivanopinion January 14, 2013, 10:35 am

    Why is Vanguard non-clean? It pays no commission, so by TDD’s definition it is clean.

  • 157 ivanopinion January 14, 2013, 10:40 am

    Similarly, the old HSBC tracker units pay no trail, so would incur the 0.35% charge. (I understand that they pay platform commission to some platforms who have enough clout to negotiate it, eg HL. But TDD’s definition of clean seems to be based on trail.)

  • 158 Geo January 14, 2013, 10:53 am

    I can see your logic, but purely using the TD fund screener using the new clean option, Vangaurd and ‘normal’ hsbc funds don’t appear in there. The link to the new structure still shows any funds paying less than 0.5% commission do not have the 0.35% platform fee.
    I may be wrong though 😉

  • 159 The Accumulator January 14, 2013, 11:06 am

    The old HSBC funds pay 0.1% in commission as can be seen by the uniform drop of 0.1% from dirty TERs to clean TERs. But I think these older funds will disappear. You’ll be able to hold them as legacy funds, but new investments will go into clean funds and you’ll pay the platform fee. That’s my guess anyway.

  • 160 Geo January 14, 2013, 11:59 am

    I can potentially see that with HSBC but its not as clear cut with Vanguard I guess/hope. Lifestrategy with a TER of 0.7 would be a pain. I was going to transfer some money from an HL isa over to TD…. not so sure now.

  • 161 ivanopinion January 14, 2013, 12:21 pm

    Accumulator, the 0.1% commission on old HSBC trackers is platform commission, not trail. By TDD’s stated definition, they are clean.

    I agree they will probably disappear, but not unless and until platform commission is banned, which is not due until end of 2013 at the earliest.

    Geo, the Vanguard funds do seem to be on TDD’s screener as “no commission” funds. I agree that the HSBC “retail” trackers are not listed in this category, but perhaps this is just a mistake.

    I note that Invesco Perpetual High Income No Trail is included in that category, even though its AMC includes 0.25% platform commission. Interactive Investor is paying a rebate on this class of funds, so I think it is absolutely clear that Invesco is willing to pay platform commission on this class. So, maybe TDD is pocketing this platform commission and planning to charge the 0.35% platform fee on top. Or, I think more likely, TDD has waived its right to this commission so that it can claim that this fund class is clean, in the sense that they receive no commission from it. If so, then I think this is very misleading, because to me a clean fund is one on which the AMC includes nothing in respect of commission of any variety.

  • 162 David January 19, 2013, 3:48 pm

    @Geo … I was going to do the same but discovered the additional 0.35% via these pages and pulled the plug on the transfer. I still reckon SWIP FTSE All Share at 0.1% plus the £2 platform fee from HL is the least costly option, at least for a single large(ish) holding. I achieve portfolio diversity via my spouses ISAs 😉

  • 163 john January 20, 2013, 11:56 am

    Am I reading it right that TD Direct’s .35% platform fee per fund is set at a minimum of £40 and therefore Hargreaves Lansdown’s £24 a year per fund works out the most cost effective broker? Also if their SIPPS are also £24 per fund then they work out as the best place to be?

  • 164 ivanopinion January 20, 2013, 1:20 pm

    @john

    Where is the £40 minimum mentioned? News to me.

  • 165 john January 20, 2013, 1:48 pm

    @ivanopinion (and everybody else!)

    It seems I can’t see the £40 minimum anywhere…I swore I saw it…perhaps I dreamt it!

    Back as you were then…

    As for SIPPS…

  • 166 ski January 21, 2013, 7:58 pm

    I was just about to start moving from HL to TD, but am now thinking that there’s no point before they’ve clarified their RDR position on account charges. I’m paying £24 pa for each of 3 x Vanguard funds (the rest of my portfolio is EFTs, ITs and a handful of trackers and OEICS) = £72 across four accounts, which seems reasonable. I reckon if I move to minimise commission now, I could end up having to move again, and it’s bad enough paying their exit charges once. Can’t work out whether I’d be better off with the rebated commission or not now!

  • 167 GLR March 14, 2013, 3:55 pm

    I moved to the UK recently and I am looking to open an ISA before the end of this fiscal year, meaning very soon. I see that TD is adding restrictions on when you are able to buy Funds: “Purchases can only be made on the first and third Wednesdays of each month, subject to change.” (from http://www.tddirectinvesting.co.uk/choose-an-account/trading-isa/~/media/uk/pdf/rates-charges-upcoming.ashx, page 3).

    Is it a regular practice among Discount Brokers?
    Don’t you find this a bit too restrictive?

    I am also very confused with their Platform Fee. They are promoting clean funds (i.e. funds with no trail commission) but at the same time they waive the Platform Fee if trail commission is below 0.5% (which is the case for clean funds by definition). Shouldn’t they promote something that would generate more revenues to them? Why is it so important for them to have funds not paying trail commission as they rebate them to the customer anyway… Surely I am missing something here.

    The website is also unclear, on the clean fund page they say “Pay no platform fee charges on clean funds until August 2013. The fee we will introduce at this time will be 0.35%. ” (http://www.tddirectinvesting.co.uk/investment-choices/funds-unit-trusts-and-oeics/introducing-clean-funds/). But they also say that “Funds paying Trail Commission of less than 0.5% annually” are waived (http://www.tddirectinvesting.co.uk/investment-choices/funds-unit-trusts-and-oeics/funds-pricing/). Does it mean that the rule of Trail Commission below or above 0.5% will disappear in August 2013 so that a Platform Fee of 0.35% will be applied whatever the fund?

  • 168 The Accumulator March 14, 2013, 11:30 pm

    @ GLR – the first and third Wednesday after the Epiphany thing, that’s for regular investment purchases. i.e. you get a discount rate if you place a monthly order. Brokers are able to offer the discount because they aggregate a large batch of orders on those particular days. It’s common, but you can also buy funds whenever you like, if you’re not interested in the discount. OEICs and Unit Trusts don’t attract trading charges anyway with TD, so there’s no need to buy them with a regular order.

    Yes, the consensus is that TD will start charging a 0.35% fee on all funds in August. In other words, the current state of affairs is a loss leader to draw you in. There are alternatives: http://monevator.com/compare-uk-cheapest-online-brokers/

  • 169 GLR March 15, 2013, 11:19 am

    @The Accumulator – Thanks for the info. And good work on this website, there is plenty of useful information!

  • 170 SkiJamieson April 15, 2013, 8:01 am

    Just chased Hargreaves to determine their position on the RDR, but it seems they’re holding fire as long as possible now….

    Dear Mrs & Mr Jamieson

    Thank you for your email.

    I can confirm that we are continuing to offer the existing retail unit classes of funds in the Vantage service for now. However, in due course we expect to offer clients the ability to buy “new” clean units of funds with no commission attached.

    Before we can proceed we must wait for the final rules relating to “RDR 2” which are due to be issued at the end of April. These rules specifically applies to platforms such as Vantage.

    Once we have the information from FCA, we will seek to analyse it quickly. We expect to be able to communicate with clients later in the summer about how the future availability of different types of fund unit will work, what the charging structure will be for holding such units on Vantage, and the status of existing retail units.

    I have attached a copy of our guide to the Retail Distribution Review to this email for your reference.

    I hope this has been of assistance to you, if you have any further queries please don’t hesitate to come back to me directly.

    Kind regards,

    Finn Henderson
    Investment Helpdesk Consultant

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