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How small investors can drip-feed into Vanguard index funds

DIY passive investors [1] have a new option when it comes to getting their mitts on ultra-low cost Vanguard index funds – Bestinvest’s select service [2].

And because Bestinvest don’t charge dealing fees on OEIC funds, Vanguard index trackers [3] are now a plausible option for drip-feeding investors on a budget.

Previously the best choice for Vanguard index funds was Alliance Trust [4] or Sippdeal [5]. But those companies charge dealing fees [6] on every purchase and sale, which puts a big dent in the return of small investors who make monthly contributions to take advantage of pound-cost averaging [7].

By going the Bestinvest route, you can now invest your monthly sum in a diversified selection of Vanguard index funds as long as you make at least the minimum fund contribution of £100 (which is very high as it goes).

Which is the best investment platform for Vanguard index funds? [8]

There’s always a but…

But the reason a mass decamp to Bestinvest is NOT a no-brainer is because it levies a charge known as the custody fee.

If an investor holds any funds from a firm that doesn’t pay Bestinvest commission, then Bestinvest charges the investor a custody fee of £12.50 + VAT per quarter (that’s £15 per quarter), and double that for a SIPP.

Bad news, but at least it’s more transparent than when a portion of the fund’s management charges are siphoned off without the investor having any idea how much commission they are paying out to the platform.

Vanguard doesn’t pay commission, so holding any number of its index funds [9] with Bestinvest amounts to an annual management charge on your account of £60, or £120 for a SIPP.

The upshot is that if you want Vanguard index funds then your ideal investment platform depends on how often you trade.

Let’s compare the options.

Which Stocks and shares ISA?

Bestinvest Sippdeal Alliance Trust
AMC* £60 £50 £48
Dealing fee £0 £9.95 £12.50
Regular investing n/a n/a £1.50

*Alliance Trust levy an AMC while Sippdeal and Bestinvest impose a custody fee for non-commission paying funds i.e. Vanguard. As far as we’re concerned, these mechanisms amount to the same thing: an AMC. 

Bestinvest’s annual management charge (AMC) is £12 more per year than Alliance Trust’s. If you used Alliance Trust’s regular investing service (£1.50 a pop) then you could make 7 trades over the course of the year before annual costs were equal. That’s barely than a trade every 2 months, so it doesn’t take long before Bestinvest becomes the more cost-effective option for a drip-feeder.

If you wanted to sell a fund to rebalance [10], that would cost you £12.50 through Alliance Trust, so a single sale would wipe out its AMC cost advantage.

Which SIPP?

Bestinvest Sippdeal Alliance Trust
AMC £120 £50 £162
Dealing fee £0 £9.95 £12.50
Regular investing n/a n/a £1.50

We can write-off the Alliance Trust SIPP straightaway as it charges a greater AMC than Bestinvest and it is saddled with dealing fees. Sippdeal offers more resistance this time and you could make seven trades in the year before Bestinvest comes out ahead.

Which standard investment account?

Bestinvest Sippdeal Alliance Trust
AMC £60 £50 £48
Dealing fee £0 £9.95 £12.50
Regular investing n/a n/a £1.50

The deal is exactly the same as with ISAs. Alliance Trust wins up until the point you’ve made 7 regular monthly purchases.

Spreadsheets at dawn

Of course, the permutations are potentially endless and torturous. But at least now there are a few different Vanguard DIY options available to investors depending on their circumstances.

Paying £60 per annum for an ISA is not to be sniffed at by a small investor. That would slice 1% off a £6,000 investment pot, so you may well be better off with a no-charge ISA and a non-Vanguard fund portfolio  [11]if you’re not investing for the very long haul.

There is another… Since I wrote this article, Hargreaves Lansdown now offer Vanguard funds [12] too. Again, there’s no clear winner, the best choice depends on how many funds you hold, in which account, and how often you trade. See here [13] for the update.

Take it steady,

The Accumulator