In this session of the MeaningfulMoney podcast, we’re going to be talking about Platforms, Wrappers and Funds. Last time we talked about asset classes, the essential building blocks of investing.

• Shares
• Gilts and CBs
• Property
• Commodities etc

This time we're adding to that by summarising the main tax wrappers, why it makes sense to invest using funds rather than individual assets, and the role the platforms have in building a modern portfolio.

These things are the mortar that binds the bricks of the asset classes together to build a recognisable portfolio.

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But before we get into that…

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Session Introduction

Very often in my day job as a financial planner, I come across people with individual share certificates. Say, BG Group or National Grid. Often these are inherited, or are windfall shares gained in years gone by. They are serving no purpose, other than cluttering up the place with paperwork.

Certainly there're not being used to build any kind of portfolio. It's like having a bag full of Lego bricks, but all separate and not actually making anything. On their own, these building blocks will never amount to anything; they need to be put together in a way which is coherent.

We do this using funds, wrappers and platforms. I want to explain these how things work, and then what you need to do to begin building your own portfolio

Everything you need to KNOW

So, let's deal with everything you need to know about Platforms, wrappers and funds

1 – The benefits of funds

Think of the asset classes we talked about last week as the smallest kind of thing we're dealing with, and we'll work up from there. Let's take shares as an example. If I hold shares in a company, I'll get:

• A Dividend, twice or four times a year, with lots of accompanying paperwork
• Annual General Meeting (AGM) information and voting forms
• Probably a shareholders' newsletter or similar waste-of-paper items

Also, there's a good chance the share will change form as time goes on, thanks to mergers and acquisitions, or corporate actions like share buybacks, or splits. What started off as 10p ordinary shares in ABC Ltd can end up being called something like Ordinary 52/87th of penny shares in XYZ Ltd.

What the heck does that mean? And how do you keep track of it all? Most people just want to know:

• What is my holding worth today?
• Will it pay me an income?
• Is it a good share to hold?

If all this paperwork and brain energy is true of holding one share, imagine the hassle and confusion that comes from holding multiple different shares! You can end up with a mountain of paperwork which leads to confusion and confusion brings inertia.

When you can't get your head around something, or it seems like an effort to engage with it, people tend to just put the paperwork in a drawer and try to forget about it. This is a sure-fire way to have your shares be worth nothing. Do this, and your future self will accuse you of negligence!

How much easier then to have someone take all that work away from you? That's what holding shares (or gilts or anything else really) in a fund can do for you.

A fund is a box in which you can keep collections of shares, or bonds, or whatever. That box is looked after by a professional manger, whose job it is:

• to make sure you are holding the best shares at any given time
• to deal with all the paperwork and keep track of any changes over time
• to look after the shares for you

This happens by the fund manager owning the shares for you, and you holding units in his fund. Funds can own lots of shares of the same type – all FTSE100 shares for example. Or they can own shares of many types – say, a global income fund which might hold shares from across the world, not just UK. They can even hold more things than just shares – gilts, property, etc.

Obviously this convenience comes at a cost, with a fund manager and a team of analysts to pay. You can expect to pay between 0.1% and 2.5% for funds in the UK.

Here are some benefits of funds:

• Convenience – One statement twice a year, even though you may hold 60 different shares via the fund
• Tax efficiency – when a fund manager buys and sells shares, there are no tax implications for you
• Liquidity – you can usually get your money out easily from a fund (property fund are sometimes an exception)
• Diversification – you can conveniently invest more widely, spreading your money further using a fund, than you would by buying the individual assets
• Access to institutional-class assets – stuff you need £1,000,000 to get a slice of the action – These tend to be cheaper than for retail buyers

There are different types of funds with different names, and which slightly different rules around them:

• OEIC – open-ended investment company
• ICVC – Investment Company with Variable Capital
• Unit Trust
• Investment Trust
• and more…

So, a fund is a really convenient way of holding the underlying asset building blocks in a way which is understandable, and affordable

2 – Funds can be held in wrappers

It's a perfectly legitimate strategy just build a portfolio of funds. Over time you'll have a useful sum of money which you can dip into or spend the income produced by it. But most people hold funds in different tax wrappers.

These are like bigger boxes that you can hold multiple funds in. They add another layer of convenience – if you hold ten funds, the paperwork adds up too, but ten funds held in (say) a pension, groups them together.

The different wrappers are distinguished by different rules on access and taxation.

Here are the main types of wrapper:

• GIA, General Investment Account – just a place to hold funds
• Stocks & Shares ISA, Individual Savings Account – tax efficient growth or interest, no CGT
• Pension – a big subject for another session, but these have tax relief on investment into the pension (the government gives you money to invest) and tax-efficient growth. In return for these benefits, they limit what you can do on the other end when you want to take money out
• Investment Bond – an investment built using life assurance rules to achieve certain tax benefits
• Offshore investment bond – as above but not held in the UK

There are others, but these are the ones you are likely to come across. You might use different ones of these for different objectives: pension for long term retirement planning, ISAs for shorter term, more accessible money. They can all hold funds, and you may hold the same or similar funds in three different tax wrappers.

Wrappers, then, are a useful way of grouping funds together to take advantage of favourable tax rules.

3 – Wrappers can be held on Platforms

Platforms are a relatively recent development. They have evolved from fund supermarkets where you had access to the funds of many different fund managers ‘under one roof'.

A Platform is now the ultimate level of organisation and convenience, allowing you to hold multiple tax wrappers in one administrative system. Web-based, they allow you to log in and see your entire portfolio, from individual shares, though to funds and tax wrappers, all in one place. You'll get one statement, twice a year, plus online access any time.

A key benefit is that all the taxation issues relating to your portfolio will be summarised in one report at tax year-end – very handy, and saves you having to collate this information from many different sources, or paying your accountant to do so.

Summarise KNOW

So we have a kind of hierarchical structure of financial building blocks. Starting at the lowest, smallest unit of an individual share (say) up to the overall platform keeping everything together.

Armed with that information, what do you need to do about it?

Everything you need to DO 

1 – If you're just starting out investing, question whether you need a Platform

While platforms are great for simplifying the administration of a portfolio, if you're just starting out, you probably don't need one. Platforms come at a cost, as do all the building blocks we've talked about. You can expect to pay between 0.2% and 0.4% of the assets held on platform per year.

If you hold £100,000 on a platform charging 0.4%, that's a £400 per year cost. In these low-return days we're in, every 0.1% counts.

If you only have one or two funds, it might make sense to hold them directly rather than on a platform, but do your own sums and see if makes sense for you, or take advice.

To complicate things here, sometimes funds can be cheaper held on a platform du to the economies of scale enjoyed by the platform provider.

2 – If you have many investments, then think about consolidating on a Platform, but choose carefully

Again, platforms come at a cost, so there must be clear benefits to you of using one if you're going to incur this cost.

If you are using an adviser, they will have identified the best platform for their clients. Part of that choice will be convenience for them as advisers, but is it convenient for you?

Make sure you ask the adviser for a demo of any platform they are recommending, and be wary of paying for tools you'll never use. Many platforms come with bells and whistles like CGT calculators, or cash-flow tools – but will you use them?

Alternatively, you could consider self-trading platforms where you don't need an adviser. I use IC Direct, but many others are available

Remember, if you're going it alone, you're responsible for checking all the details – find out what the costs are. It shouldn't be hard to find out. If the costs are hidden – be wary

3 – Use your ISA allowance, stupid

ISAs are the most tax-efficient vehicle out there for ordinary investors (more options are available for the wealthy). The current ISA allowance in 2013/14 is £11,520 of which up to half can be in a Cash ISA

• Cash ISAs are not investments, just short term, tax-free savings pots -bank accounts
• S&S ISAs have capital gains benefits

More details about all the available tax wrappers in future sessions, but for now, using your ISA allowance is a no-brainer.

4 – Get a pension

For long term savings, you can't beat a pension for tax-efficiency. Nowhere else do you get free money from the government for saving. This comes with Terms and Conditions though:

• You can't access the money till (currently) age 55
• Then you can only get at 1/4 of it – the rest has to buy an income in some form
• Pensions grow like an ISA largely free of income tax and entirely free of CGT

Find out if there's a pension at work (there probably will be if the company is of any size at all). If there is, then you should probably join it. If your employer pays into it for you, this is free money and you definitely should consider joining. In a couple of years, auto-enrolment means that all employers will have to pay into pensions for their employees.

If there isn't a pension at work, or if you work for yourself, look at stakeholder pensions as a good entry into pensions savings. I'll be adding more detail about how to build a meaningful (that word again!) portfolio over time in future sessions.

Summary

OK. We've looked at the building blocks of a portfolio and how they fit together. There is much more to this than I can possibly fit into 30-40 minutes, but for more info, click the search button at the top of the page and search for whatever type of asset, fund, wrapper or platform you're interested in. There are 280 videos of detail to check out.

That's it for this session of the MM podcast; I hope that was helpful.

Any questions? Please leave any comments or questions below, or leave me a voicemail by clicking the green bar on the far right of the website.

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I hope you enjoyed this session. Next time we'll be talking about property investing with Rob and Rob from The Property Podcast

Thanks for listening – I'll talk to you next time!