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Our updated guide to help you find the best online broker

[Note: A version of this article was accidentally emailed out by technical gremlins a few weeks ago. We really have updated this time!]

Okay, UK investors, after taking the pain of creating a whopping great comparison guide to the UK’s leading online brokers, we’ve once again returned to the battlefield to fully update it.

Eating a bag of rusty nails water would have been more fun, but it would not have produced a quick and easy overview of all the main execution-only investment services.

Fund supermarkets, platforms, discount brokers, call ’em what you will – we’ve stripped ’em down to their undies for you to eyeball over a cup of tea and your favourite tranquilizers.

Online brokers laid bare in our comparison table

Who’s the best broker?

It’s impossible to say. There are too many subtle differences in the offers. The UK’s brokers occupy more niches than the mammal family, and while I know which one is best for me, I can’t know which one is right for you.

What I have done is laser focus the comparison onto the most important factor in play: Cost.

An execution-only broker is not on this Earth to hold anyone’s hand. Yes, we want their website to work, we’d prefer them to not screw us over, go bust or send us to the seventh circle of call centre hell… These things we take for granted.

So customer service metrics are not included in this table. It’s purely a bare-knuckle contest of brute cost for services rendered.

Why should investors flay costs as if they were the tattooed agents of darkness? Because if – as the FCA predicted – you will see an annual after-inflation return of 2.5% on your portfolio for the next decade, then the last thing you need is to leak another 1% in portfolio management charges.

This makes picking the best value broker a key battleground for all investors.

Using the table

I’ve decided the main UK brokers fall into three main camps. These are:

  • Fixed fee brokers – Charge one price for platform services regardless of the size of your assets. In other words, they might charge you £100 per year whether your portfolio is worth £1,000 or £1 million. Generally, if you’ve got more than £25,000 stashed away then you definitely want to look at this end of the market. Bear in mind that fixed fee doesn’t mean you won’t also be tapped up for dealing monies and a laundry list of other charges.
  • Percentage fee brokers – This is where the wealthy need to be careful. These guys charge a percentage of your assets, say 0.3% per year. For a portfolio of £1,000 that would amount to a fee of £3. On £1 million you’d be paying £3,000. Small investors should generally use percentage fee brokers, but even surprisingly moderate rollers are better off with fixed fees. Many percentage fee brokers use fee caps and tiered charges to limit the damage but the price advantage still favours the fixed fee outfits in most cases.
  • Share dealing platforms – Platforms that suit investors who want to deal solely in shares and ETFs. Sites like X-O and friends fill this brief.

Choosing the right broker needn’t be any more painful than ensuring it offers the investments you want and then running a few numbers on your portfolio.

The final point you need to know is that this table’s vitality relies on crowd-sourcing. I review the whole thing every three months, but it can be permanently up-to-date if you contact us or leave a comment every time you find an inaccuracy, fresh information, or a platform you think should be added.

Thanks to your efforts as much as ours, our broker comparison table has become an invaluable resource for UK investors.

Take it steady,

The Accumulator

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Weekend reading logo

What caught my eye this week.

Figures from HMRC, as reported on in the Financial Times [search result] show the tax take from capital gains tax and inheritance tax rising fast in recent years:

Much of the increase is apparently due to growing tax receipts from property sales. The FT quotes Sean McCann, a chartered financial planner at NFU Mutual:

“Landlords are being caught in a very effective pincer movement from the taxman. From one side the higher rate tax relief on mortgage interest is gradually being phased out and making letting properties less profitable. From the other side, landlords looking to sell buy-to-let properties are being squeezed with an extra 8 per cent capital gains tax.”

I suspect most Monevator readers won’t be too sad to see buy-to-let being squeezed after a 20-year boom. I’m not against the rental sector on principle. But I did think the game had tilted too much in favour of landlords, and I was glad to see measures to address that.

Of course I myself swooped to buy my own home barely a year or so into the resultant correction. My stellar record of making a fist of the erstwhile millionaire-maker that is the London property market continues!

Tax take

I don’t think property is the whole story, though. It doesn’t take a charting genius to notice the previous peak in capital gains tax receipts was just before the last bear market. So after a decade of strong stock markets, at least some of the latest surge is surely also coming from investors coughing up on selling unsheltered investments.

Always use your ISAs and SIPPs as much as you can! Don’t be a klutz like me 15 or so years ago, when I was tardy in sheltering my investments.

I am still defusing capital gains tax liabilities from back then – as well as some built up when I’d filled ISAs but hadn’t started on a SIPP – and expect to be doing so in a decade.

You might say it’s a high-class tiny violin problem to have; perhaps but it was also an unforced error.

Back then I thought tax on investments was only a concern for moguls. Not only was I wrong, but in the eyes of The Man anyone pursuing the sort of high six-figure portfolios required for financial independence pretty much is a mini-mogul.

Now I’ve got rid of nearly all the dividend payers it’s not such a pressing issue as it was (at least not until the rules change again) but it is a pain.

Paying investment taxes can savage your returns, for no risk/reward upside. Use tax mitigation strategies wherever legal and practical.

[continue reading…]

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How to improve your sustainable withdrawal rate

A hamster in a wheel with the caption enough of this already.

Thus far we’ve explored why the 4% rule doesn’t work in the real world, and established a more sustainable withdrawal rate (SWR) for UK / global investors. Please read those articles if you’ve not already done so, in order to get the most out of this piece.

Now for the good bit! We’re going to talk about why you can use a higher SWR if – and only if – you’re prepared to execute a withdrawal plan that’s considerably more sophisticated than the 4% rule.

To raise our SWR we’re continuing to use the layer cake concept advocated by leading retirement researchers William Bengen and Michael Kitces.

The layer cake personalises our SWR by applying a suite of plus and minus factors.

  • The last post was all about the bad stuff. We saw how it forced my SWR down to 3%.
  • Now I’m going to layer on all the positives, and test my approach using global historical data.

Without wanting to ruin the surprise, I was pretty shocked by the results you’re about to see and I think I’ll need to be more cautious than the test suggests when the rubber really hits the road.

Even Kitces is very clear about the layer cake’s limitations:

Although the ‘layer cake’ approach of safe withdrawal rates does allow for planners to adapt a safe withdrawal rate to a client’s specific circumstances, there are several important caveats to be aware of.

The first and most significant is that many of the factors discussed here were evaluated in separate research studies, and it is not necessarily clear whether they are precisely additive.

Okay, so remember my SWR is currently bottomed out at 3%.

Let’s head for the top!

Diversification sweetener

Our baseline SWR assumes we’re invested in a Developed World 50:50 equity / bond portfolio. Yet there’s plenty of evidence that a stronger equity tilt and more diversification increases your SWR, especially over longer time horizons.

The shotgun spread of long-term equity returns means that an equity-heavy portfolio can shoot the lights out sometimes. However it also falls far short of the target on unlucky occasions. Bonds can staunch the bleeding when equities haemorrhage, yet too much bondage may also cripple you over time.

Early Retirement Now (ERN) sums up the dilemma:

Stocks have a lot of short-term risks, but in the long-term stock returns are tied to economic growth and thus, in the very long-term, real returns become less risky due to that.

Bonds have relatively little short-term risk around their trend growth rate, but their trend growth path itself has a lot of risk in stark contrast to stocks.

The answer isn’t to simply load up 80-100% in equities and hang on for dear life. Rather we can aim to alter our asset allocation as we go.

Michael McClung in his brilliant retirement portfolio book, Living Off Your Money, recommends an eve-of-retirement bond allocation of 50% for a 30-year time horizon, or 45%-35% bonds for longer stretches.

The reason for starting retirement with a heavy bond load is that you’re particularly susceptible to sequence of return risk in the closing years of accumulation and the opening decade of deaccumulation. You can protect yourself during this period with high-quality government bonds.

Kitces has shown how an ill-timed stock market crash can setback your retirement plans like an asteroid strike scuppered talking dinosaurs. He also explains how the sequence of returns in the first 10 to 15 years of your retirement can seal your fate for good or bad.

It’s important to have enough bonds to deal with these threats, and to deploy your bonds effectively.

McClung in particular has developed techniques to help you do this – see the ‘dynamic asset allocation’ section below. The trick is that you allow your bond allocation to wax and wane according to market conditions.

More generally, the historical data sampled by Kitces, Bengen, McClung and others tells us that broad diversification beyond bonds works in retirement just like it does during the accumulation phase.

They cite evidence in favour of diversifying your retirement portfolio with:

Kitces offers a diversification bonus of +0.5% SWR for significant multi-asset class diversification. It seems daft not to take it.

The Accumulator’s layer cake SWR:

3% + 0.5% diversification = 3.5%

Dynamic asset allocation

The best way to protect yourself from sequence of return risk? Live off your bonds when equities are down.

Beyond that you can further improve your portfolio’s life expectancy by using a rebalancing method that increases equities exposure when they’re seemingly cheap, and only replenishes bonds when equities have seriously outperformed.

This is dynamic asset allocation. It’s a super-charged version of ‘buy low, sell high.’ You can read about McClung’s version – called ‘Prime Harvesting’ – by downloading a free sample of his book.

Techniques such as dynamic asset allocation will test your risk tolerance because in extreme market conditions you may eat all your bonds and end up 100% in equities. Steer clear if you’re cautious.

Otherwise Kitces awards 0.2% to your SWR for dynamic allocation.

The Accumulator’s layer cake SWR:

3.5% + 0.2% dynamic asset allocation = 3.7%

Flexible spending and dynamic withdrawal rates

Here is the big SWR cherry on top. If you can cut your spending during a downturn then you gain a massive advantage over a constant inflation-adjusted withdrawal plan.

Dynamic withdrawal rates mean you adjust your spending in sympathy with your portfolio’s fortunes. Like managing a forest, being able to conserve your resources when they’re under stress is obviously more sustainable than consuming an ever greater percentage when the rot sets in.

Flexibility is key. Retirement researchers have devised all kinds of rules that allow you to spend more when the market soars, but you must also spend less when there’s trouble at mill.

McClung does a masterful job of analysing various dynamic withdrawal rates in his book, while ERN has written a sobering series exploring how much you might have to cut back using one of the better known spending systems.

In practice, cutting back is what all retirees do if their money runs short. The risk is that extra spending early in retirement may force us to spend less later if the cookie doesn’t crumble our way.

That gamble may be easier to take if you believe that retirees spend less later in life. What do you reckon? The evidence is patchy and may not apply to you. I’ve read research that concludes retirees spend more if they have it, but spend less on average because most end up with less to spend.

Kitces’ flexible spending modifier:

  • +0.5% SWR for modest spending cuts in bear markets and/or plan to decrease spending in later life.
  • +1% SWR for substantial (10%+) spending cuts in bear markets and/or plan to make significant cuts in later life.

I think Mrs Accumulator and I can handle 20% spending cuts so I plan to use Michael McClung’s EM dynamic withdrawal rules. Our State Pensions should meet near 70% of our estimated outgoings later on. I’m gonna claim the full 1% bonus!

The Accumulator’s layer cake SWR:

3.7% + 1% flexibility bonus = 4.7%

My new world portfolio SWR

My personal SWR was creamed by negative factors in the last post. It finished up at just 3%.

Now it stands at 4.7% and I’m stunned.

What does it all add up to in cold hard cash?

Well, we’d like an annual retirement income of £25,000, so our retirement wealth target at 4.7% SWR is:

(1 / 4.7) x 100 x £25,000 = £531,750

In contrast our target at 3% SWR was £833,333, which was 57% higher.

Wow. Just wow.

If I use the ‘4.7% rule’ then we’re FI already!

The sniff test

The big question is does this layer cake business pass mustard?

The research shows that your SWR changes dynamically as you shift the parameters. I can test these moving goalposts using global historical data thanks to the fantastic Timeline app.

Timeline is commercial software created by retirement researcher Abraham Okusanya. It’s aimed at financial planners who want to model portfolio withdrawal plans.

Timeline is very well designed, loaded with great features, and delivers the Holy Grail of global / UK appropriate datasets. I think it’s worth paying an IFA to run your numbers through it if they have access.1

My 4.7% SWR achieved a 99% success rating on Timeline – success means historical me didn’t run out of money in 99% of scenarios.

The bottom 10% of scenarios did require me to cut spending drastically to actually avoid running out of money though. That may not be your idea of success.

On the other hand, every path above the 10th percentile was comfy, and the best case scenario near-tripled my income for years. I used all the layer cake assumptions – good and bad – to get the result but was able to leave our State Pensions in reserve.

However that doesn’t tell me that my 4.7% rule is safe or even sustainable. We live in the future, not the past. I won’t experience the historical data in retirement, though hopefully I won’t face anything worse.

The truth is that a lower SWR is safer no matter how much kung-fu you know, so I’m not actually going to adopt a 4.7% SWR.

4% it is

So after everything we’ve been through I’m going to choose 4%.

Editor: You clutz! You total time-waster! Is this your idea of a joke?

Okay look, it’s thousands of words later and I’m as aghast as anyone, but I’m not using that 4% rule.

  • I’d have to use a 3% SWR to live with naive, constant inflation-adjusted rules.
  • But 4% with all the layer cake trimmings works with McClung’s system and it comfortably performs in Timeline.

In short, I am only happy to choose 4% because it leaves me room for manoeuvre when allied with the withdrawal techniques we’ve touched on in this series.

I also have – and must have – a Plan B.

Maybe my ability to use complex techniques will ebb through my eighties and nineties? Maybe I won’t even make it that far – a big problem given Mrs Accumulator’s interest in dynamic withdrawal rates continues to hover around zero. (“But look, they’re dynamic!”)

Plan B is to switch to a simpler, safer Floor and Upside strategy when our State Pensions kick in and annuity rates tip in our favour.

Aside from that we’ll maintain an emergency fund, there’s always the house to sell or reverse mortgage, and there are side hustles to hustle if we have to.

More than anything, digging into the research has taught me that a SWR is a very personal number. Like inside leg measurement personal. And it’s probably not even a number.

Really, it’s a floating set of coordinates that give you something to aim for. Your final destination can only be known when you arrive.

Take it steady,

The Accumulator

  1. For a fixed fee of course. []
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Weekend reading: People forget that people forget

Weekend reading logo

What caught my eye this week.

I debated a Tweet of Morgan Housel’s this week, after that excellent financial writer retweeted President Trump’s suggestion that Boeing should rebrand its 737 MAX after two fatal crashes. Morgan thought this good advice from the President. I wasn’t convinced.1

Here it is as a screenshot (I’m not sure if you can embed conversations from Twitter):

You’ll see Morgan has 132 Likes for his Tweet. And you’ll notice my pithy reply has zero.

Morgan replied to me with the example of Arthur Anderson, the scandal-struck Enron accountancy firm that was ultimately renamed Accenture.

A snappy riposte that eight people Liked – including me!

A couple of people Liked my subsequent comments, but really, I mean literally a couple. On the numbers, Morgan had won.

Here’s the thing though. I am right.

Edgy material

Whenever I wonder what my presumed source of edge is as an investor, ten minutes on Twitter puts me right.

It reminds me people prefer to be outraged. People prefer to be melodramatic. People emphasize the recent and close at hand to an insane degree.

Super well-read Morgan knows all this of course, and he could easily have written my reply to him on another day. But I suspect many of his followers cycle from one 24-hour crisis to another, every day watching the world come apart at the seams. Apparently.

So as I say, I’m right – people forget.

A few examples:

  • In 2015 the US Mexican food chain Chipotle saw its shares crash from around $750 to around $250 in the wake of several E Coli outbreaks. Sales fell because people didn’t want to get poisoned. I heard numerous analysts repeatedly write the stock off as dead money. But last year’s revenues were Chipotle’s highest-ever, and it’s smashing expectations again. People forget.
  • After being revealed to have cheated emissions tests, Volkswagen was condemned as having not just trashed its own brand but also that of German manufacturing writ large. It was a scandal! There’d be boycotts, big fines, maybe a restructuring. Yet 2018 was Volkswagen’s best year for car sales ever. People forget.
  • In 1989 we had the Exxon Valdez oil spill in Alaska – one of the worst in history – which trashed the environment and saw Exxon receive additional criticism for its slow response. Never mind, by 2006 it was the most valuable company in the world. People forget.
  • Or how about the terrible behaviour of all the Wall Street banks in the run up to the financial crisis? So bad it almost brought down the global economy. You remember, that guy wrote that book they made into a film. Never again! The big banks had to be broken up! Even I ranted! But were they subsequently taken apart for their sins – by disgusted customers if not by regulators? Yeah, not so much. The biggest Wall Street banks are far bigger than they were before the crisis. People – boom – forget.

I could go on and on – these are just the examples that first popped into my head.

In fact it’s harder to think of companies that didn’t recover from a public relations scandal!

I know what you’re thinking – there was the Ratner jewelry debacle in the early 1990s, when the CEO Gerald Ratner told a business conference that his products were cheap because they were “total crap”. Hundreds of stores were closed in the aftermath. You won’t find a Ratner-branded shop on the High Street today.

True, but that’s because the company was rebranded Signet in the 1990s. It’s now listed in New York and is valued at well over $1bn. So it didn’t die – but it did feel the need to rebrand. I guess we can chalk this one up as a win for Trumpian thinking.

I’m not saying companies don’t fail. They do, all the time. But in my experience it’s rarely because of a one-time issue. They fail because their products or practices become out of step with their markets.

We have to remember survivorship bias – doubtless I’m forgetting companies that did disappear because they, well, disappeared.

But the general point stands – much of the time people forget. They forget the terrible thing that happened a few years ago. They forget who it happened to. They even forget bull markets follow bear markets, as the Of Dollars and Data blog explained well this week.

They forget that they forget.

There are many things eroding edge in the financial markets, but the collective wisdom of Twitter isn’t one of them.

[continue reading…]

  1. Aside: Wow, how little of that paragraph would have made sense a decade okay? Tweets, retweets, public debates, Boeing having a safety problem, and – yikes – President Trump. []
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