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.
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
- From July 1, TD is introducing a platform fee. But this one isn’t like the Hargreaves Lansdown flat-rate slap in the face.
- 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 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 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.
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.
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 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.
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.
Take it steady,
- Look out for forum member Fagun’s complaint template in particular. [↩]