It’s showdown time: Online brokers [1] are finally being forced to reveal the fees they will charge in the post-RDR [2] world.
No longer can the holdouts mask their costs with commission. Over the next couple of months everyone will have to reveal their hand, because trail commission can no longer be paid from new investments from 6th April.
In other words, you will no longer be paying for superficially ‘free’ broker’s services via an inflated Ongoing Charge Figure (OCF) [3] routed via your fund manager.
Take a look at our broker comparison table [4]. Every firm in the commission-funded broker and fund supermarket categories will have to come clean on its prices shortly; don’t be fooled into thinking they’re offering a good deal until they’ve revealed their post-RDR fees.
[5]
To attract new money from customers, brokers are now scrambling to offer what are known as Clean Class1 [6] funds. And they will have to levy an explicit platform fee [7] for their own services.
Clean Class funds are just a sweet-smelling, compliant variant of the old-style Unit Trust and OEIC funds that most brokers offer now. The difference is that the Clean Class funds have stripped out trail commission and platform fees from their OCF.
So generally Clean Class funds are cheaper than their Dirty counterparts – but then you’re stung for the broker’s fee on top.
At least you can see what you’re paying and to whom, but if you’re a passive investor [8] like me, then your costs are expanding faster than the waistlines of the Western world.
Fund laundering
If you’re already sitting on a pile of Dirty Class funds, then one of two things is likely to happen:
Conversion – Your old funds will be converted into their equivalent Clean Class variant. This shouldn’t cost you anything and your broker should tell you if it’s happening. The unit amount and price of your new fund will likely be different to the old, but the value will be exactly the same.
You are not liable [9] for Capital Gains Tax [10] when your fund converts, even if you aren’t sheltered by an ISA or a SIPP.
Stasis – Your dirty fund is closed to new investment. It can still grow / plummet in value, but you can’t put new money into it and it will continue to pump trail commission into whichever financial organ is feeding from it. Any regular investment scheme will cease but you can still sell your fund.
Even so-called legacy funds must stop commission payments by 6th April 2016, so they will all have to be converted by then.
Best broker bugaloo
By the end of the next few months we should finally have a good idea of how competitive our current favourite brokers are really going to be.
We’ll track the changes on our broker comparison table [4] and keep you in the know.
If you have a small portfolio (£30,000 or less) then look for a broker that charges a percentage of your assets and no dealing fees on funds. The current champion of the little guy is Charles Stanley Direct.
Investors with large portfolios suffer when fees aren’t capped, so look for a fixed cost broker. Interactive Investor looks very cheap now on that score, especially for families with multiple accounts.
Note that some brokers don’t charge a platform fee for Exchange Traded Funds (ETFs) [11] in ISAs or trading accounts. This can work out well for large investors, as dealing fees make ETFs a costly business for anyone who can’t trade at least £300 a throw.2 [12]
If you want to leave your broker after a price hike then ask them to waive their exit fees. Some will do this automatically to offset bad PR and some will do it if you twist their arm. Others will just be complete gits about it.
Bear in mind that prices will never be set in amber. The cheapest broker one quarter could well be trumped the next. If you’re fuming over a price rise then check how many years it will take to earn your exit fees back if you switch, even if you pick the best option. (You might do this if you decide to switch funds [13], too).
Don’t get ripped off but don’t agonise over a comfortable place in mid-table either.
Take it steady,
The Accumulator
- Super Clean is an industry term that refers to discounted variants of funds. Super Clean variants are offered exclusively to powerful platform players in return for greater promotion / not being destocked, that sort of thing. Super Clean equals a bit cheaper but definitely not cleaner. [↩ [18]]
- A dealing cost of 0.5% via a £1.50 regular investment fee is the maximum I could stand to bear on a single ETF purchase. [↩ [19]]