Flat-fee platform Interactive Investor looks set to gobble up rival platform EQi. It’s just the latest in a Hungry Hippos frenzy of deals in the UK.
What should we little guys make of all these clashes of the corporate titans?
This latest Borg-ing is still unconfirmed, but according to Sky News:
II is close to announcing the purchase of EQi, a division of the FTSE-250 support services group Equiniti.
City sources said this weekend that II had agree to pay in the region of £50m for EQi.
Sky News, 17 January 2021
Sky News has a history of on-target business scoops. EQi’s parent Equiniti has now confirmed to the market it’s in talks. The Sky article is written in language that suggests the reporter has been told it’s a done deal.
And the merger makes financial sense to me, too.
Low-fee execution-only online stockbroking is a scale game. The more customers and assets under administration a platform has, the more the costs of its website and trading infrastructure are spread around.
True, extra customers generate extra customer support. So it’s not entirely cost-less to scale.
Hargreaves Lansdown played catch-up for a couple of years to keep its vaunted higher levels of service up to snuff. That showed up in rising expenses in its reporting.
But even service could improve with a larger asset base. It could mean more money to invest in automated solutions, for instance, such as better chatbots.
Higher revenues should also mean more money to fix problems that would have caused the customer issues in the first place.
I’m sure it’s also potentially cheaper to acquire customers via acquisition than by marketing to them. Internet advertising is very crowded.
Against all that, there’s the hassle of integrating a new system – or at the least a new cohort of customers – with the predator’s existing setup.
Makeover, takeover
So much for the broker oligarchs justifying expanding their fiefdoms.
Everyday savers like us might wonder: what’s in it for us?
The loss of EQI would not remove a huge competitive force from the landscape.
The EQi platform was itself born by the takeover of Selftrade a few years ago. It had a rebrand and a website makeover that was a bit marmite-y to users. But it’s hardly shaken up the market.
As for EQi’s fee structure, my co-blogger and platform maven The Accumulator describes it as “absolutely byzantine”.
The Accumulator should know – he’s the man who crunches this stuff for our broker comparison table.
In his latest once-over, TA found EQi did have appeal for investors building a portfolio from ETFs who wanted an unrestricted range of options. (Compared to Vanguard, say, which only offers its own funds).
Seems a niche market, though.
Consolations of consolidation
Beyond the specifics of this deal, I can see some advantages for consumers of ever-bigger platforms:
- Cost savings might be passed on to consumers as lower charges
- Potentially more stability and superior customer service
- ‘To big to fail’ platforms should invite greater regulatory scrutiny, reducing the risk of systemic failure
- Arguably fewer, larger platforms could be more competitive with each other than with myriad smaller, weaker rivals
On the other hand, there’s reason to fear relentless consolidation.
For a start it’s a hassle. I’ve had trading records vanish following a merger. You might also have to redo elements of identifying yourself to the platform. The acquirers’ anti-money laundering standards may be higher or different.
More importantly for the long-term, there must be a danger that it could reduce competition.
Dealing fees should fall further
Right now the UK investing scene seems fairly competitive – but with definite room for improvement.
In the US trading fees on stocks have pretty much vanished on the major platforms. That shows we’ve still got work to do here.
We do have Freetrade in the UK, and very popular it is, too. But a quick look at our table shows plenty of trading fees being levied by other brokers.
I believe charging dealing fees is no longer sustainable. Any execution-only trade costs basically nothing for a platform to execute these days. With the likes of Freetrade highlighting and exploiting that, rivals look dear. I can only see dealing fees eventually going to zero in the UK.
This suggests we have little to fear from rising prices for share dealing.
As for funds, it’s hard for platforms to hike prices too much with Vanguard now operating in the UK. At least for sensible index investors.
Vanguard may not be the cheapest option for all passive investors in all circumstances. But it is close and it acts as a huge gravity well pulling down what other platforms can realistically charge.
Then there are all the fintechs and neobanks pushing towards adding share dealing and other investing services to their offerings.
Again, hard to see the opportunity to hike prices if other firms are making dealing a bolt-on commodity.
Show me the money
Before anyone begins to feel sorry for the plight of platforms, note the big ones make plenty of money.
Hargreaves Lansdown had £104bn in assets under administration as of June 2020. It claims to have just over 41% of the direct-to-consumer platform market, so it’s by far the biggest beast.
On that hefty market share Hargreaves generated £551m in revenues to June 2020. This turned in a pretax profit of £378m, thanks to the chunky margins the platform enjoys.
Its shareholders can decide whether this was good enough to justify Hargreaves Lansdown’s market cap of £7.45bn.
The point is Hargreaves has a lot of profit levers to pull to make money. As well as lots of margin fat to eat into.
It’s a similar story at fellow listed broker AJ Bell. It has £56.5bn of assets under administration, on which it turned a profit of £49m.
Interactive Investor reportedly has £36bn of customer money under its purview to-date. Talk is the company will float some time this year. At that point we would get more insight into its financials.
Meanwhile Freetrade has gathered hundreds of thousands of customers. But when it last raised money it was still not reporting a profit. The start-up has been choosing instead to reinvest any cash generated into the business for growth. It has raised successive rounds of capital to keep the lights on.
The jury is still out on the Freetrade business mode. Clearly it’s a pressure for competitors to reckon with though.
Plenty of platforms in the sea
We’re still far from having to worry about competition being diminished when it comes to investing platforms in Britain.
As our broker comparison table demonstrates, there’s still plenty of options, even after an Interactive Investor / EQi marriage. Our table doesn’t yet include all robo-advisers and the like, either.
Sure, the endless corporate coupling is something to keep an eye on.
But for now I’m content these mergers reflect brokerages fighting to ensure they’ll be left standing among the winners. As opposed to nailing on that we investors will be the losers.
Still, I’m a naughty active investor who is used to paying higher costs than most (sensible) Monevator readers.
I’d be interested in hearing what you guys think in the comments below?
Note: This article contains affiliate links to Interactive Investor, Hargreaves Lansdown, AJ Bell, and Freetrade. If you sign up we might receive a payment from the company, but that doesn’t affect the price you pay. At the time of writing the author is an investor in Hargreaves Lansdown and Freetrade.
Eek, I have been assimilated, and I own a mere 400 Lloyds preference shares, held for aeons since Lloyds guzzled Leeds Permanent BS (via Halifax).
One assimilation may make little difference but many will. I always thought building societies were a Good Thing (RegTM) but they were gobbled up and what impact do they now wield.
Interactive investor are on a buying spree having recently acquired The Share Centre so getting ready to float looks highly likely. I’m happy so far having migrated to them after decades with a more expensive platform. Customer service particularly for Sipps is laboriously slow although courteous and knowledgeable. The trading website is basic but adequate.
Lets hope their development improves customer service tines but I dont see them cutting trading fees any time soon.
Well done Monevator for quick analysis and comment!
As soon as one of the platforms I was using got bought by interactive investor I left.
That’s the major flaw with a platform consolidation strategy. When you are buying discount fee platforms by definition your customer base is very price sensitive and not stupid.
Interactive Investor is just building an IT frankenstein’s monster to look like AJ Bell and HL to get a fat valuation for their private equity backers. The IT integration will no doubt blow up in their faces shortly after flotation.
As long as their are 4/5 big cheap platforms in the UK to spread your investments around (HL/Bell/ii/Fidelity/Vanguard) I think its fine
My big worry would be Fidelity or Vanguard choose to abandon the UK market as it is too small post-Brexit
Then we really will be price gouged
Fun fact about JC Flowers, interactive investors backers: https://www.ft.com/content/f097c37c-4bf9-11e1-b1b5-00144feabdc0
I won’t personally be lining up to participate in that IPO
My big worry would be the death of flat-fee platforms. For fund investors, options are already thin on the ground, and seem to be diminishing. Post-RDR, the major platforms appeared to take the decision to price-gouge fund holders, while holding costs low for share and ETF investors. How else to explain the large disparity in platform fees for funds compared to those for shares and ETFs?
AJ Bell hiked my platform costs by a factor of six times while I held a SIPP there (moved out promptly, of course!). And HL’s 0.45% platform fee for funds has never, ever held any appeal — personally I’d be losing £thousands/year more if my accounts were with them, rather than with Interactive Investor.
(Before someone points out that a move from tracker funds to tracker ETFs would sidestep this … true for ISAs and for SIPPs, but impractical for unwrapped trading accounts where realising gains leads to a substantial capital gains tax liability.)
I’ve been an Interactive Investor user for years – paying £20/ month + Trades fees + 1.5% fx fee of US shares, on top of a clunky platform. I finally decided to switch over to Freetrade now they are offering SIPP’s as well as ISA’s. Should save £150/year + 0.5% fx fee and free trades.
I have quite a bit with II, partly because of an ATS sipp. I have had no problem with them however the range of fixed fee providers is now very limited. My concern is that they will adopt a more agressive approach in the future to assist the float. I would guess their line will be that a high percentage of customers are relatively passive and don’t contribute enough so we are increasing certain charges to eliminate this effective cross subsidy. So I watch II’s expansion with some concern.
@Jumper
‘impractical for unwrapped trading accounts where realising gains leads to a substantial capital gains tax liability’
A couple of points:
– raging certainty II will ramp up the fees (and introduce some big transfer in incentives) ahead of float
– yeah, people with funds are subsidising everyone else now, rather like people with overdrafts paid for banking for everyone else, a decade from now the regulators might do something about it
I’m an EQI client (from Selftrade times).
About the Byzantine cost structure… I’d agree. I only have an ISA and a trading account, and as much as I’ve tried, I have no idea exactly how much the cost is, or should be. I receive an annual fees statement, but it’s hard to tally up with actual charges (they seem to be charging product fees out of the cash element of each account, at different times… plus a general fee which I haven’t seen debited from anywhere yet, and then part of it is offset from trading fees paid during the quarter). All in all though, I have a ball park idea. And in any case, we’re talking a flat fee in pounds, not a %.
Admittedly I haven’t tried much of the competition, but, for a largely passive investor with a small-medium portfolio size, and that doesn’t trade much, I think that the cost differences between fixed-fee platforms aren’t usually worth the hassle (and cost) of migrating. I would avoid %-based cost structures, unless they were capped at a very reasonable level comparable to a fixed cost.
I do miss the days of simple cost structures, I seem to recall a £25/year fixed ISA fee with no other costs, not that long ago. Now it is several times higher, with the precise figure obscured under quantum-level uncertainty.
I am a EQI SIPP customer also from the selftrade days, have been considering a move to a flat rate platform for 12 months, ironically i was going to move to ii before i read more about JC Flowers and thought better of the moderate cost saving. Decision made for me now it seems…
I am wondering (hoping) will EQI customers be offered to exit fee-free once the merger is announced … or is that wishful thinking!
Fidelity has recently bought out Cavendish although committed to the lower platform fees of 0.25% for 12 months. I need to have a look at your comparison table (thanks TA!) as a %-based fee is probably costing me more than a flat-fee due to the value of my SIPP/ISA. Although it does seem like the flat-fee brokers add in plenty of additional costs (regular investing, pension transfers, SIPP fees) that Fidelity doesn’t!
I have north of £1m with II and have used them for a number of years; SSISA and SIPP (mostly Vanguard). Their fixed fees are very low.
My experience with them has generally been OK but the site isn’t great to use on all aspects. Reasonable communication though, and I have quite a lot with them over the years. Sometimes small/odd things.
One thing that miffs me is that they send only quarterly statements now electronically and charge if you want an electronic annual statement, which is pain if you are a long term passive investor.
I worry they pool units though because with my two accounts I have traded the same Vanguard fund £ amount on the same day, and yet months later these two accounts have (slightly) different valuations (!?), despite the same initial £ investment, which doesn’t seem correct to me as I thought the fund price is fixed once per day. I should probably chase this up with them.
So I’m very much in favour of II moving into the “too big to fail” category as I’d be very vulnerable if they had to do a mass unwinding – in theory my units are held in Vanguard but on aggregate, who really knows? Would I lose some of my units if II went to the wall? Perhaps.
We are having a few issues with Hargreaves Lansdown at the moment. Eighteen months ago we set up a JISA with them for my step-granddaughter and it was straight forward. We now have another granddaughter, so we tried to do the same. In the meantime my partner had moved in with me so it wouldn’t allow the direct debit without sending Id because of change of address, even though they already took a DD from my partner. I’ll give them the benefit of the doubt and put this down to money laundering laws rather than HL.
So we sent the necessary Id, which they lost. Fortunately they were copies but I still feel uneasy about not knowing what happened to them. When we rang, the guy who eventually informed us that they were lost was completely useless and didn’t seem to know what he was doing. I did read later on this site about the HL meltdown so I assume he was bank staff.
We sent second copies of the ID and ask them to inform us when they had received them for piece of mind. They did this and told us they’d get back in touch when the Id was approved. This never happened.
Last weekend we logged in to see if we could set up the DD but this option has now been removed from their web site so we need to either ring or fill in a form. If we ring then we need mum with us because JISA’s have to be in a parents name but she can’t come around due to Covid rules, of course this is not HL’s fault.
To make matters worse, we wanted to change the first granddaughter’s fund. So we logged in and guess what? We need to either ring or send in a form. I’ve downloaded the form but it’s not exactly clear about how we fill in the form to switch funds. I can obviously ring without ‘mum’ and ask hypothetical questions about the form but then we will have used, internet, telephone and post for a 2 minute job on any other platform. Are HL still operating in the 1990s?
“I believe charging dealing fees is no longer sustainable. Any execution-only trade costs basically nothing for a platform to execute these days. ”
I’m not sure about this, although hope to be proved wrong! There are marginal costs associated with each trade (e.g. exchange fees, settlement, custody) as well as the fixed cost of running the platform.
Robinhood in the US relies on selling orderflow which is not allowed in the UK. Freetrade relies on upselling ISA/Premium plans. Trading212 relies on CFDs.
II does report limited results already. I was surprised to see revenue is split approximately one-third each across monthly fees, trading fees and interest income. Monthly fees covered half of costs in FY Dec-19.
https://www.ii.co.uk/about-ii/results
@platformer — I guess we’d be quibbling about what “basically nothing” means. 🙂
We’re talking pennies not pounds for those transactional costs as I understand it.
Just had a quick Google and the most authoritative summary of costs I found (and very briefly skimmed, so may be misreading!) was from 2010, as below. (There’ll definitely be newer stuff about but it’s not popping up for me right now!)
Things have changed since 2010 (UK/EU regulation, Brexit etc) but I doubt it’s got more expensive.
As I read it this has a ‘large user’ paying 28p for all-in pre- and post-trading costs:
https://www.oxera.com/wp-content/uploads/2018/07/Costs-of-securities-trading-and-post-trading%E2%80%94UK-equities.pdf.pdf
Of course 28p is not nothing, but I’d say it’s close to “basically nothing”, especially if there’s an ad valorem element to that cost. And whether it’s 5p, 15p, or 50p, it’s clearly not £12.50 or whatnot as regularly still charged in the UK.
If there is any non-zero cost to trading then there’s a risk for platforms of going to zero if retail investors churn their portfolios beyond the costs covered by other income streams, such as platform fees.
But one imagines that is a minority sport, similar to those who abuse “unlimited download” type broadband plans?
Be interested to hear if anyone can link to a more up-to-date UK-focused source for costs of retail execution and settlement.
Agreed marginal costs are very low! I guess it’s a question of accepting higher platform fees to cover the fixed costs. II’s results suggest they would need to double their monthly fees just to cover their costs at current scale in order to eliminate trading fees (and ignoring interest income which presume is very low right now). Maybe a Vanguard for shares where the annual platform fees reduce as the scale benefit is passed on…
IB does currently offer a ‘cost plus’ model at 5bps per trade + pass-through of all trading costs (or a fixed fee of £6 for UK shares).
@neverland, where did you manage to find as an alternative to II? I was also transferred last year but couldn’t see an obvious alternative.
Flat fee providers increasingly scarce, I am with II and iWeb, can’t see any other obvious options.
I’d imagined lots of negative comments about this given the opinions people have given in other threads.
An interesting (and somewhat reassuring) write up. Thanks!
I see a ‘shake out’ of platforms in the UK as inevitable. HL have benefited from their first-mover status but I can’t help thinking they’re vulnerable to attack and loss of market share from both Vanguard and II. Contrary to other comments here I see fixed fee/percentage hybrids as the way forward. That’s the model that Vanguard has used with their low price cap and a percentage fee for low value/start up accounts below that. In the II model I wonder if the income splits have been caused by their move to monthly fees with a ‘free trade’. Perhaps their accountants have chosen to count those trades as trading fees rather than monthly fees.
I agree that a shake-out should mean more investment in platform tools. Alex Graham’s ‘How investment platforms could evolve to add more value’ (see Saturday’s reading list) suggests that this could be a source of differentiation so step forward Vanguard, II et al !
The II approach to date seems to have been to ‘cherry pick’ the best of their platforms but this has led to a bit of a ‘hotch potch’ of functionality and migrated data in separate areas. Perhaps they’ll take the opportunity to produce a consolidated (mirrored) data base with the ability to combine SIPP and (all) ISA data into one view, automatically calculate time-based and money-weighted returns and back-test to you heart’s content. You know, all the things Monevator readers do themselves across multiple websites and spreadsheets. But now I’m dreaming 😀
Been with II for a while, definitely in favour of them moving to large plc. Always been good to deal with via email but the platform itself doesn’t particularly inspire confidence. I once had someone else’s dividends show up (for a share I do not own). All sorted out easily but how does that happen? Would they ever have noticed? Can you really trust the numbers they give you?
Interesting insights but some of them seem to miss the mark. I use EQi for my LISA, namely for: (a) it’s extremely low platform fee for LISA-only customers at 0.2%, and (b) they let us use the regular investing service to buy US equities and a wider range of UK Etfs for a nominal dealing fee though only once a month (AJ Bell, interactive investor and HL only let you buy selected UK shares and investment trusts using regular investing, not to mention being too expensive).
I’ve got my ISA with Trading212. I tried freetrade but disliked the interface and need to pay extra for premium features like stop loss etc. However I do see the value I would get from freetrade’s premium offering. I know lots of upwardly mobile “millenials” like myself who basically don’t use any of the legacy platforms because they are gauging their customers on dealing fees. As an example if I have a free option, why should I pay HL £2.50 a month to buy £100 of Scottish Mortgage Trust and an additional £2.50 to buy a £100 of Vanguard FTSE-all world ETF in addition to their annual platform fee. I still have an older s&s ISA with HL. The regular investing service is so limited and all trades execute on the same day generating volume, this is just pure eye gouging. Exploitation of customers by legacy brokers, diminishing competition coupled with poor “technology-second” approaches and interfaces, make buying anything from them a painful experience. These older platforms just seem like most FTSE-100 companies, industrial dinosaurs that, in crude Darwinian terms, need to evolve or die. A different generation of investors may have accepted such abuse in the name of better “customer service” but to me these dubious platforms like HL with their industry sponsorship and recommendations seem to be exploitational. I don’t know who they are working for… The fund managers or their users?
I think EQi had a really compelling LISA offering compared to the limited competition here (I think only HL and AJ Bell offer self-selected S&S LISA) and I’m actually pretty annoyed about this merger as II who I’ve used in the past are generally expensive with little benefit. If only freetrade or T212 offered a LISA! Now I have to see my savings eaten away by these monoliths while cursing at their counterintuitive apps!
In the middle of the EQI to II transfer.
II asking for my ‘password’ despite Eqi using a username, date of birth and pin format. Fed up already. Now that I’ve read that JCFlowers is behind them, I’ll immediately migrate out of II.
Etoro looks promising and offers the possibility of dabbling in crypto.