Looks like it’s game over for cash rebates and the last surviving refuges where small passive investors are spared the pain of significant platform charges.
Within a year, we’re going to be choosing from clean class funds with slimmed down OCFs1 (Hooray!) while paying beefed-up fees for our platform / fund supermarket / execution-only brokers (Hiss!).
New rules from The Financial Conduct Authority (FCA) will abolish commission-based payments for DIY platforms, bringing them into line with the RDR revolution that hit financial advisors on the eve of 2013.
It’s a massive shake-up for the industry that will force many investors to rethink their choice of funds and brokers.
We’re in for a prolonged buffeting from the bow waves of change as a result, so here’s Monevator’s navigational guidance:
The headlines
- Cash rebates are banned from April 6, 20142.
- Platform services must be paid for by a platform charge that the investor explicitly agrees to.
- Unit rebates are allowed. In other words, platforms may negotiate special offers with fund managers that are passed on to investors as extra shares.
- Critically, the unit bonus must be passed on in full rather than siphoned off in part by the platform.
- 6 April 2016 – the date ‘legacy’ funds bought before April 6 2014 will have to cease their surreptitious commission paying. All funds will be converted to clean class by then.
Why it’s good
Platforms will no longer be allowed to present themselves as ‘free’, while actually carving out a living from the inflated annual management charges (AMCs) that most investors think go to fund managers.
The idea is that investors will know exactly what they’re paying in fees and that will incentivise platforms to become more competitive.
Fund groups like Vanguard, that refused to pay commission, will become more widely available and put greater cost pressure on the rest of the fund industry.
Fund groups won’t be able to use fat fees to push for undue prominence on platforms, supposedly. They’ll probably buy adverts instead.
The FCA has warned the platforms and the fund groups that it’s got its beady eye on them and won’t put up with any naughties.
Why it’s bad
The financial industry is abuzz with theories on how platforms might circumvent the rules. No-one really believes this is ‘over’.
Small passive investors will pay more for platform services. The old regime took 0.1% in platform charges from an HSBC retail index fund. Now the cheapest clean class platform fee is 0.25%.
Unit rebates (along with cash rebates) are now subject to income tax (outside of an ISA or SIPP). They are on the way out like a football manager after a bad run, which is likely to lead to…
Super clean share classes – Certain platforms are already browbeating fund managers to offer them cheaper versions of clean funds.
In other words, Platform A stocks Fund X with an OCF of 0.75%, but Platform B uses its market muscle to get the same fund for 0.65%.
If you’ve ever stared at MorningStar late at night trying to work out the difference between the F, R and I versions of a fund (what, just me?) then you may well fear supping from the alphabet soup that many in the industry are predicting.
On the other hand, if platforms are able to force down fund prices then investors benefit. I have a feeling that they won’t be scrapping over the lean index fund pickings, anyway.
Now what?
You have just under a year to choose your new investment home – unless you’re lucky enough to be with a super-competitive broker already.
We’ll keep our broker comparison table updated to help you make an informed choice in the months ahead.
Right now, the market approach to platform fees for clean class funds is split in two:
Percentage based fees – The best approach for small investors. Charles Stanley Direct and TD Direct charge along these lines.
Flat-rate fees – Fixed charges (say £60) that put a sizable dent in a small portfolio will barely scratch larger pots. You’ll normally pay an annual fee and then extra to trade on top. See Alliance Trust, Sippdeal, Interactive Investor, Best Invest, and The Share Centre.3
To calculate whether you’re best off with flat rate or percentage-based fees:
Estimate the best annual flat-rate platform charge you can get including trading fees. Divide that number by the best rival percentage charge.
For example:
£60 / 0.0025 (or 0.25%) = £24,000
That number is the breakeven point. At that point, a portfolio worth £24,000 will pay the same platform fee (£60) regardless of whether your broker charges a flat rate or a percentage.
If you’re well under that figure and will remain so for years then go for the percentage based platform.
The example assumes you can buy an identical portfolio of funds at either broker. If not, then our article on clean class funds will help you factor in fund OCF differences.
Do nothing
Most brokers have yet to wean themselves off the commission sugar. There will be a flurry of activity in the next six months as they work out a platform charge fit for the new paradigm.
I believe the majority of investors will be better off sitting tight and waiting for the shake down. Moving your portfolio can be a costly business, so it’s best to do it only the once.
Until April 2016, if you’re sitting on a heap of old-style funds then you will only incur a platform charge on the portion of funds that are sold or ‘changed’ after April 6 2014.
Change does not include:
- Reinvesting dividends.
- Automatic rebalancing.
- Regular contributions set up before 6 April 2014.
Change does include:
- Increasing your regular contribution.
- Switching funds in a SIPP.
- Re-registration.
By 6 April 2016 all funds will be converted into clean class anyway, and commission payments will cease. Not long now.
Take it steady,
The Accumulator
- Ongoing charge figures. [↩]
- Bar leeway of £1 a month per fund so platforms can run promotions and the like. [↩]
- From end of May. Full details of charges are yet to be finalised. [↩]
The risk is that some platforms will just not host funds that don’t make it worth their while through advertising, mail shots and so on.
Since only one platform is currently profitable so we are likely to see some consolidation in the sector.
So how about switching to EFT (assuming you are on one of the platforms with free nominee account)? Sometimes these free platforms require an ISA account , (but this is a good idea anyway) and/or a minimum balance.
Trading cost circa £10, ongoing fees zero (apart from the OCF, tracking error, etc). Therefore the payback depends on the size of the trade & the time held, but for many might be a better deal.
This is assuming the OCF, Tacking error, etc is the same on the underlaying investment, which given they are often the same thing but in different clothes may not be a bad assumption.
H-L is the major player most hurt by this as it largely torpedoes their entire business model.
I’ve not been in this investing lark very long (a few years) but it seems to be a constant moving target. Personally, I have no real issue with (particularly active) funds and rebates etc. as there are good cheap passives available with modest choice anyway before all this. So, the only people impacted by fund rebates were those who chose expensive (probably active) funds. Who cares? I don’t, and they don’t either otherwise they wouldn’t buy.
Investing accessibility/knowledge is getting harder and harder – the “alphabetti spaghetti” of fund classes will become nigh-on impenetrable to all but the most hardcore, and the constantly shifting sand dunes of platform pricing models mean that I can see many people giving up long before they get near parting with money and decide property, Zopa or the bookies is a better way forward.
ETF’s are no solution to this either – platforms will charge for holding these or simply the ISA/SIPP account itself (or both). There is no free lunch to be had here. The costs – and decision choice/responsibility – is being firmly pushed back on the individual investor, whether they like or not. Is this move intended as quid pro quo for the IFAs?
Retailer investors (me) never asked for this – I’ve been plenty happy in my bubble – more than anything, I’d just like them to stop f**king about with the whole thing for 5 minutes, please!
Here’s an amusing article by Andy Bell (AJ Bell/Sippdeal)
http://theplatforum.com/articles/alternative-view-fca-paper
And some good news…
“Hargreaves to cut investor costs and £2 passive fee”
http://www.citywire.co.uk/money/hargreaves-to-cut-investor-costs-and-2-passive-fee/a676956
An Admirer, I disagree about ETFs not being a free lunch solution.
I-Web and X-O, for example, already do a share-only ISA and I don’t see why their charges would need to change.
I’m with HL at the moment, with virtually everything in passive funds, but if I don’t like their new charging structure when it’s announced (their claim that 0.28% pa only covers their costs doesn’t sound too promising), then going down the ETF path will be a live option for me.
I certainly don’t fancy paying 0.4 or 0.5% pa on a £100k portfolio!
But I’m with you on clean class funds, they won’t make any difference to me.
Just to add to the grief, note that FSCS protection against your platform going bust is only £50k, rather than the 85k/Euro 100,000 for cash savings. For people with a larger holding than that it isn’t as simple as just go with the flat-rate fee and max the amount out. If Rob is right that it really is the case that only one platform is currently profitable this risk is worth bearing in mind, it a nasty low-probability risk that could do some serious damage to one’s holdings!
Re: fees for EFTs:
I currently have ISA accounts that are not charging for ETFs or other share holdings, with the following:
-X-O
-Charles Stanley Direct
-TD Direct
However some have restrictions such as minimum holdings, or number of trades which are not a problem for my situation.
Re FSCS:
I have multiple broker accounts for this reason, but due to the “unfortunate” growth in capital value over the years, I am still exposed. I just hope the nominee aspect (the separate accounts for client holdings) helps if the worst comes to the worst.
@Tronader — Good spot and thanks for sharing, though I see the headline is misleading and they haven’t said they WILL cut the £2 fee, only that they are looking at it. I think the past year has taught us to be wary of jumping on headlines and incomplete information. Personally I’d continue to hold tight until all the options seem to be on the table.
@ermine/Ric
Surely you mean only cash holdings, right? If you hold UTICS/ETFs/shares etc. then legally you own those units/shares – the platform does not own them. So, if the platform went bust then your investments are still held by you because the funds are separate legal entities (there is still potential single fund manager risk) – generally, your liability is up to the full amount invested i.e. like a share, anyway. So why would you worry about > £50k in single platform unless you mean > £50k in cash (!!)? What am I missing?
@AnAdmirer
My understanding is that you are absolutely right, and this is the advantage of the rules pertaining to nominee accounts (the separate accounts for client holdings). However the risk is not zero, because of the things you mentioned and more …
* the cash in the account that is not invested is usually held in a high street bank in which case it counts as part of your £85K protection for any single bank group failure
* fund manager risk
* broker fraud, misconduct or bad execution of the processes that are there to project us
* loss due to market movements if you can’t trade due to a broker going bust, the delay to sort it out could be years
* other unforeseen stuff
Therefore to reduce these risks I have multiple accounts, but I am still worried because the size of my holdings with each broker is growing all the time (well, most of the time anyway!)
I would be interested to hear the views of others on this topic.
ETFs incur trading fees. Funds don’t on certain platforms. The final cost tally depends on the details of your portfolio and OCFs, but there’s no great workaround by going the ETF route.
Recently moved to the UK so please forgive my ignorance of the local market. I’m a passive investor looking to invest £100K+ in a vanguard index fund (direct) or vanguard ETF, but can’t figure out which is the best option. I understand that the fund will have a higher TER and might also have a purchase and/or redemption fee. What I can’t seem to figure out is what is the best/cheapest way for me to purchase a vanguard ETF if I only plan on trading 1-2 times per year (mostly just to reinvest dividends and contribute more capital).
@AGK Look on this site for details of platform comparisons. This should help you. Also for £100k outside of any tax wrapper, I think you can go to Vanguard direct (have no idea what they charge). I would encourage you also to read up on ISA/SIPP tax-free accounts.
On ETF’s, I noticed also that H-L charge 0.5% holding fee already. The Citywire article suggests H-L are considering a move to a tiered % pricing model across the board soon – this is certainly not good news for me. I wonder if this is the beginning of the end for H-L? A few grumbles over on the comments on CW.
@Ric Agreed/understand. Personally, I hold a lot less in cash so this doesn’t worry me (probably not even £85, let alone £85k!). Execution/broker risk I think is minimal as it’s highly automated and the sums you and I trade are piddly compared to institutional investors. However, fund manager/fraud risk is something I do worry a lot about – particularly as there are arguably only a few UK passive providers at sensible cost (Vanguard/HSBC, maybe L&G, maybe Blackrock).
@Ric
“* the cash in the account that is not invested is usually held in a high street bank in which case it counts as part of your £85K protection for any single bank group failure”
I asked the FSCS in the past about whether or not the £50K you might hold in cash in an investment company (and they might hold it on a high street bank) would count as part of your £85K with that high street bank and they replied that they were independent.
Not sure if they misunderstood the question though, did you read this information somewhere?
@Tronader
http://www.x-o.co.uk/investor-protection.htm:
“Under the Financial Services Compensation Scheme (FSCS), in the unlikely event that any of the banks that we use is declared in default, each individual client is entitled to up to a total of £85,000 in compensation for losses across all their deposits with that institution.
The FSCS also provides clients of Jarvis (and other organisations regulated by the FSA), compensation of up to £50,000 per investor for UK securities.”
So the key words are; ” … across all their deposits with that institution.”
I have seen similar wording for my other brokers, although TDW is slightly different as the cash element for them is regulated by the Dutch authorities, see section 29.2: http://www.tddirectinvesting.co.uk/special-pages/~/media/uk/pdf/a4_terms-of-service-may-2011.ashx. The Dutch scheme covers EUR 100,000 “regardless of the number of accounts held.”
@Ric
Thank you Ric, that explanation is more clear to what I received from the FSCS. I think they might have misunderstood my question.
Thanks!