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Don’t let the fear of RDR stop you from investing

number of fledgling investors have been wondering whether they should postpone their first plunge into investing because of the upheaval caused by the Retail Distribution Review (RDR), going by the chatter we hear in the Monevator comments and across the forums.

Even some seasoned DIY investors appear to be paralysed by the platform fee buboes that keep bursting out on their execution-only brokers.

Switching brokers is possible, of course, but it equals hassle, pain, and expense.

It’s enough to make you stay in cash. Don’t let it!

RDR is moving the goalposts

RDR 2: The FSA Strikes Back

For starters, the new rules on platforms aren’t due to come into force until we’re partying like it’s 2014.

  • RDR Part One ends hidden payments to Independent Financial Advisors (IFAs) on 31 December, 2012.
  • RDR Part Two is going to kybosh stealth payments to platforms by 31 December, 2013.

If all goes according to plan, platform fees will be deducted in plain view from our cash accounts, rather than being sneakily siphoned off via a fund’s Ongoing Charge Figures (OCF).

The idea is that explicit charging will sting, and so cause us to ask searching questions about levels of service.

But the Financial Service Authority (FSA) is still pondering over the final draft of the rulebook. It hasn’t given a precise date for a decision. It may still change its position or delay RDR Part Two altogether. It has form.

What’s more, the FSA is itself going to be abolished and replaced by new authorities – supposedly in early 2013.

It may well feel like the last week of school in there.

Every day counts

Let’s say it takes another year for the FSA – or its successors – to pronounce a verdict, for the platforms to fully respond, and for the dust to settle on a new pricing landscape.

The FTSE All-Share has gone up 13% in the last 12 months. Assume, for the sake of argument, this performance is repeated over the next 12 months.

As a newbie investor, even with only £500 invested, you’d still be up on the £50 or so it would cost to transfer to a new platform with a couple of funds in your portfolio, should you choose to invest now and move if you need to later.

I’m not pretending I know the market is bound to soar over the next 12 months. It could just as easily crash, or flatline like an Ed Miliband joke.

But either way it’s a mistake to allow a minor detail like saving a few quid on platform fees to be the tail that wags your investing dog.

Dithering could cost you the few days in the year that the market goes on a tear. And if your platform proves uncompetitive then transferring out isn’t the end of the world.

Of course, if you’re getting cold feet for some other reason, then that’s perfectly understandable…

Known unknowns

An upheaval like RDR risks more unintended consequences than traveling back in time and chatting up your nan.

Here’s a few of the potential googlies that could keep investors on the hop for a long time yet:

  • RDR may run foul of the EU’s decision not to ban commission in its MiFID II review. That leaves open the possibility of European platforms selling funds to UK investors while eluding the clutches of RDR.
  • Some execution-only brokers will slip through the loopholes created by the FSA’s definition of a ‘platform’. These brokers may well be able to rebate commission in cash with the FSA’s blessing. A final decision has yet to be made.
  • The FSA is also considering allowing platforms to rebate fees as units rather than cash. In other words, they might compete by offering us bonus shares in our funds.

That last one beggars belief, as the FSA has already expressed the view that trail commission is used by fund providers to buy preferential marketing treatment on platforms.

If rebates still exist in any form then that practice is likely to continue by another name.

What to do now

Of course, none of this pondering solves the problem of finding a good home for your investments today.

My best suggestions for no-fee or low fee brokers can be found here. You can partially prepare for the future by choosing a platform that’s already declared its hand on RDR.

Remember the answer to any investing question is about as straight as a journalist in front of the Leveson inquiry, but for passive investors who want to buy index funds in an ISA:

  • Cavendish Online – Claims its no-fee model is likely to survive RDR. It charges nothing bar the TER. You can’t buy ETFs though, should you fancy it.
  • TD Direct Investing – No charges if you have over £5,100 in your portfolio. Otherwise it’s £36 a year. No dealing fees for funds.
  • Selftrade – Beats TD Direct if you’ve got less than £5,100 and will definitely trade once per quarter. Otherwise the inactivity fee is £10 per quarter. Funds are free to buy, but not to sell.
  • Hargreaves Lansdown – Platform charges are £24 per fund per year. No dealing fees. It makes sense if you want a portfolio consisting of one or two funds you can’t get from the first three platforms (e.g. Vanguard LifeStrategy).
  • Alliance Trust – Platform fees are £48 per year and you can buy funds at £1.50 if you make regular investments. Beats Hargreaves Lansdown if you want Vanguard, hold more than two funds, and make eight or fewer regular purchases a year. Otherwise look at Bestinvest.

Note, I haven’t exhaustively searched all 100-odd execution-only brokers in the market. I gotta go eat soon. But this is an informed snapshot. If you can find a better RDR-friendly deal then please let us know in the comments below.

Finally: More Vanguard options

It’s also worth mentioning when choosing platforms that the Vanguard funds will now be much more widely available, as it has struck a deal to appear on Cofunds – the platform that lies behind many broker’s online convenience stores.

Platform fees will apply, potentially along the lines of Cofunds’ Explicit Charging Structure, which amounts to a £40 annual fee plus 0.29% on the first £100,000. That will be a mighty wallop if your platform doesn’t cap it.

So that’s the long of it. The short of it is: it’s a mess but don’t let RDR put you off the investing fun. Monevator will be here to help keep you up to speed.

Take it steady,

The Accumulator

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{ 13 comments… add one }
  • 1 Rob October 23, 2012, 11:45 am

    You don’t have to use a platform. Investing directly cuts out the platform fee. The downside is you may lose the tax wapper, but these days the tax advantages of an ISA are modest.
    SIPPs allow you to invest gross, but you will pay tax on your pension.

  • 2 ermine October 23, 2012, 11:48 am

    just a minor technicality, TD say fees won’ be charged on accounts > 7500, not 5100

    An inactive TD Trading Account is defined as an account that, at the close of business on the relevant Quarter Date, has had no trades executed on it since the previous Quarter Date, and has a cash and / or portfolio valuation of £7,500 or less.

    but it doesn’t apply to ISAs (as I read it you don’t pay accoutn fees on an ISA even if it’s worth less than £7500 and you don’t make any trades in a quarter, but interested parties should check that with TD of course. Unfortunately I can’t link to the relevant part of their site, but it’s in rates and charges

  • 3 gadgetmind October 23, 2012, 12:11 pm

    I use BestInvest for my SIPP and my wife’s ISA. They are better for larger pots as you need £50k on platform (across multiple pots and people) to get lower dealing fees and some trail rebate.

    No fee for funds and most trackers but £60pa for an ISA and £120pa for a SIPP if you want to hold Vanguard trackers, equities or ETFs.

  • 4 The Investor October 23, 2012, 12:38 pm

    these days the tax advantages of an ISA are modest.

    Disagree on that Rob, certainly for any long-term investor building up a portfolio. Over the long-term saving tax on income and capital is going to deliver a lot more value IMHO then skipping a platform fee, especially given that competition is going to cap the latter I think. In a recent article I showed how compounded gains of 10% a year could favour the tax-sheltered account by as much as 58%.

    Sure it was a simplification (as I discuss further on in the article) and I didn’t consider platform fees, but the takeaway is I certainly wouldn’t call the tax advantages modest. 🙂

  • 5 gadgetmind October 23, 2012, 12:47 pm

    Tracking holding prices etc. for unwrapped shares is a right royal PITA. I have to do this for my wife’s high-yield portfolio and for some tech shares we hold, and really wish that I didn’t have to. (See Section 104 holdings to see what I mean.)

    Ditto tracking dividend income, overseas dividend income, interest, coupons, and PIDs and then having to do a tax return.

    The ISA subscription limit is an annual “use it or lose it”, so use it!

  • 6 Rob October 23, 2012, 12:55 pm

    ISAs only really make sense for high rate tax payers as the dividend clawback has gone.
    Don’t forget that a SIPP has to be used to buy a pension, which is taxable.
    Don’t get me wrong tax shelters are great and should be used. But they have been the major factor pushing investors onto platforms and into the hands of intermediaries.
    Just because they want your money doesn’t mean you have to let the tax tail wag the investing dog.

  • 7 The Investor October 23, 2012, 1:09 pm

    ISAs only really make sense for high rate tax payers as the dividend clawback has gone.

    Well, we’re going to have to agree to disagree, although I agree the advantages are much more clear for higher-rate tax payers (who I would imagine are the overwhelming majority of equity investors and Monevator readers, FWIW).

    If someone is investing £5K for a few years in an ISA and is a lower-rate tax payer and always will be then fair enough, but for anyone under 40 with long-term ambitions and a savings plan, I’d always recommend ISAs — the costs are trivially recouped.

    Even saving the paperwork is a boon!

  • 8 Simon October 23, 2012, 3:28 pm

    For what it’s worth, my ISA is with TD Direct – their Regular Investment variety – and by sticking to funds I have never paid a penny in charges, regardless of my balance.

    the tax advantages of an ISA are modest

    I know TI has picked that one up, but I have to wade in. Even for a basic rate tax payer, outside an ISA, you’re looking at 20% shaved off your returns each year. That’s HUGE even before you take compounding into account.

  • 9 The Investor October 23, 2012, 4:11 pm

    @Simon — Just to clarify, I presume you’re talk about cash or bonds.

    Basic rate tax payers don’t pay any tax on UK dividends from shares, even outside of an ISA (see: http://monevator.com/how-uk-dividends-are-taxed/)

    However the other point on ISAs (which are really off-topic for this post, so perhaps this should be the last word 🙂 ) is you can’t use up your fixed annual allocation retrospectively.

    So if your tax position changes in a few years time because your salary increases or your portfolio grows, unshielded investments made when an ISA didn’t seem so relevant to you might well have to remain unshielded.

    (I speak from experience, and it’s a pain in the… accounting!)

  • 10 john October 27, 2012, 6:39 pm

    Like for like, from my reckoning, if you trade monthly and hold three funds then Hargreaves Lansdown beats Alliance trust.
    24 platform fee x 3 + o dealing fees = 72
    v 48 platform fee + 1.50 x 12 = 76

  • 11 ivanopinion November 5, 2012, 2:53 pm

    Interactive Investor might be better on some fact patterns. They now have the Vanguard funds available. They charge an annual fee of £80, but this gets you a credit against dealing fees which would cover 12 monthly purchases, for instance. If you want to do more than 12 purchases a year or you want to sell during the year, they would be cheaper than ATS. If you want more than three passive funds, they will be cheaper than Hargreaves Lansdown. (They will also beat HL if you have any significant holdings in funds that pay more commission rebate at Interactive Investor.)

  • 12 The Accumulator November 8, 2012, 10:17 pm

    @ Ivan – are you sure the rebate can be set against monthly purchases? I haven’t looked at it for a while, but I’ve got a nagging doubt about that.

  • 13 No 2 Economics April 16, 2013, 9:53 pm

    @ The Accumulator the rebate is paid back into your trading/ISA account as cash from which the monthly purchases are made.

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