It’s session number 37, and we’re going to be looking at some of the different investment platforms that you can use to build your own investment portfolio. With the massive decline in the numbers of advisers in the UK, particularly in banks and building societies, many people are turning online to do their own investing. To meet this need, many platforms, both new and well-established are available, offering investments to the masses.
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With so many platforms to choose from it can be hard to tell one form the other. They all essentially offer the same thing, the ability to buy shares, funds, ETFs and other kinds of asset, either within an ISA or outside one, and to have access to your investments online.
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So in this session I thought I would look first at the things you need to know before you choose a platform, and then look at the top four platforms according to some recent research completed by The Platforum.
So let’s look first at what you need to know when choosing an online investment platform:
Everything you need to KNOW
1 – Charges
Regular listeners will know that charges are a big deal when investing for the future. One of the benefits of using an online platform as that you remove the cost of ongoing advice. I could also argue that this is a disadvantage where the ongoing advice received is good, but we’ll drop that for now!
Charges can cut into your returns over time and compounding works just as well for charges as it does for investment returns. After all, every pound you spend on charges is one pound less that can’t be compounded up for the future.
Unfortunately, charges are not simple, but it is important you understand the different charging layers involved when investing.
Fund cost – This is the cost of the underlying fund you are investing in. It is the charge levied by the fund manager and should include all the costs of holding that fund. The charge used to be called the AMC or Annual Management Charge, but these days you’re more likely to hear about TER or Total Expense Ratio. Which is odd because it isn’t a ratio at all.
We’re in a time of change in the fund management world. It used to be the case that the AMC of the fund was divvied up between the fund manager, the platform you invested with and your financial adviser if you had one. One charge covered all these and it was difficult to see who got what slice of your money. Things are getting clearer though, and many platforms and fund are moving towards ‘clean’ charging. The fund will levy one charge, the platform another and the adviser another. You should be able to see who gets what – it’s your money after all.
Account fees – Turning now to the investment platform, there will sometimes be fees levied for particular types of accounts. Pensions or SIPPs, for example will often come with an annual charge, usually a fixed cost, say £95 plus VAT for a year. Obviously this is a large chunk out of a small pension account, but a pittance on a half million pound pot. Be careful of fixed fees if your portfolio is small. ISAs usually do not have account fees attached.
Dealing or Transaction fees – This is the cost the platform charges for when you buy and sell an investment. Usually these are fixed costs, say £20 per transaction. But they can rack up if you’re a frequent trader. If you are planning to make lots of trades on your accounts, you need to bear this one in mind.
Platform fee – Very often, the platform itself will levy a fee for using its services. Usually this is a percentage of your investments, say 0.3% per year, but can sometimes be a fixed fee so be careful
Other fees – Some platforms will charge you for reinvesting dividends, or for transferring assets away from the platform to another provider. Make sure you check the small print and low what all the likely charges are that you will incur.
2 – Features
There are a million different funds, shares, bonds, ETFs and other things you can invest in using these platforms. Some will give you access to pretty much anything you wish. Others will provide a panel of screened funds for you to buy. Different asset classes will come at different costs.
Usually you will be looking at packaged investments on a platform. So you’re unlikely to be able to buy gold bars or physical property. But you will be able to buy a gold fund or ETF, or a property fund or REIT.
It’s very important that you understand the difference between the different kinds of holdings. What is the difference between a unit trust and and investment trust, for example? Why is a physical ETF different from a synthetic ETF?
Choice is good for sophisticated investors, but may be overwhelming for those just getting started, who should probably stick to the safe waters of collective funds like Unit Trusts and OEICs to start off with.
The other area of choice is the number of different accounts available. All platforms will provide you with an ISA and a GIA (General Investment Account) and most will provide a SIPP too. Others may provide Cash ISAs, Junior ISAs and Child SIPP.
Make sure you know what you are investing in and choose a platform that gives you what you want, without overwhelming you with too much choice.
3 – Information
Modern investment platforms are so powerful and provide so much choice that the best ones also will provide you with some way to navigate the options available to you. They will educate you as well as give you the mechanism to invest your money.
This information will come in different forms such as blog posts, fund reviews, model portfolios for you to buy off-the-shelf. There may also be structured courses you can work through to give you a good grounding in investment knowledge before you part with your hard-earned.
They should make this information easy to come by – the best platforms know that an informed investor will be a loyal investor. Some platforms are beginning to include a social networking element so that members of the platform can help each other with forums and commenting systems designed to connect the community.
Having considered the three main criteria for choosing an investment platform, Charges, Features and Information, I thought I would have a quick look at some of the major players in the investment platform arena. It’s worth mentioning that this is a rapidly growing and changing space. There will doubtless be some platforms which don’t make it. Stick to the big names and you should be fine.
By the way, these are the platforms for self-directed investors. If you have an adviser he or she might well be suggesting you use one of the platforms more geared to advised investors.
So let's look at some actual platforms and see what their relative strengths are. Then at the end I’ll give you a great link where you can keep up to date with the latest thinking on direct investment platforms – stay tuned.
It is worth mentioning that I have only personal used one of the platforms below, and I’m not going to tell you which one. I obviously have to be careful not to be accused of making any recommendations here other than generic ones. The others I have researched and checked out the site – they all have strengths and are all worth considering. Do your own research and make up your own mind…
1 – BestInvest
Bestinvest has some great information to get you going with your investment portfolio whether you are a novice investor or more experienced. I like how the platform will let you set a goal and a timescale and the system will help you invest towards it, taking into account your tolerance for investment risk.
There are stacks of tools for sifting the available investments, and you can pick ready-made portfolios if you want a short cut. The infer is regularly updated and is of high quality.
There is a huge amount of choice of funds, shares, investments trusts and ETFs, so pretty much anything you could want to buy is available. You can hold these investments in a GIA, an ISA, a Junior ISA, and a SIPP pension.
The costs are pretty reasonable I reckon. When buying funds there are no dealing fees, and if you need to switch funds in future there are no switching fees. Shares, Investment Trusts and ETFs come with a dealing fee of £7.50 each time which is reasonable.
You’ll pay £12.50 plus VAT per quarter for holding shares etc in an ISA or GIA, and £25 plus VAT per quarter for holding them in a SIPP.
This ‘custody fee’ gives an idea as to how BestInvest are making their money. They are receiving kick-backs form the fund providers of differing amounts. You get to buy the funds at retail prices, BestInvest negotiate a discount, and pocket some or all of the difference. Share, Investments Trusts and ETFs don’t pay these kick-backs which is why BestInvest charge you for holding them. In due course this will be the case for all investments. They will be clean charging and you’ll know where you are, which is a step in the right direction. BestInvest is behind the curve on this, and I’m sure their charging structure will have to change soon, so watch out for that.
Apparently, service from the BestInvest team is excellent, among the best of all the platforms tested, so that’s a major plus. There is lots to like about BestInvest, for sure.
Next up is one of the best-established names in stockbroking. A key differentiator for CSD is their clean charging structure. There is a flat annual percentage fee of 0.25% for the first £500,000 dropping to 0.15% for money above that figure. That’s simple, clean and easy to understand – I like it.
The choice of accounts is more limited, just a GIA, ISA and SIPP. A Junior ISA is coming though apparently. CSD only offer clean funds, which is great news – no commission is being paid or received on your investments, so you’ll just pay the clean price for the fund, plus CSD’s fee.
Stocks are traded at £10 a pop, and unless you do six or more trades each six months, you’ll be charged the 0.25% on those holding too. You can buy Gilts and Bonds which you can’t through BestInvest, but you can’t buy them online, only over the phone. There are extra charges for holding them though.
The SIPP costs £100 plus VAT per annum, whereas BestInvest’s SIPP comes at no charge. Yo can see how the layers of costs are different to each platform and can be difficult to quantify. The only way is to work out what you are going to be doing with each platform:
- How much you are going to invest
- How often you are going to trade
- What wrappers you will use
- What underlying assets you want to buy
Only when you have worked this out can you work out which is the best for you.
Charles Stanley came out middling for service, but I found their site much easier to navigate than BestInvest’s. There is much less information on there though, so it is more a platform for experienced investors than novices.
HL is the grandaddy of all self-investment platforms. They are a FTSE100 company and are simply, massive. You can get advice from them, just as you can from BestInvest and Charles Stanley Direct, or you can DIY.
There is a huge range of choice on HL, both of wrappers – you can get a Junior ISA, a Cash ISA and more pension options than you can shake a stick at – and of underlying investments. Pretty much anything is available.
There are some great guides for you to learn about investing and some off-the-shelf portfolios to pick from to get you going. There is an incredibly prolific blog and more news, calculators and stuff than I’ve ever seen in one place before. It’s an incredible resource, possibly the only site you’ll need (with the exception of MeaningfulMoney of course!)
Because there is so much choice on HL, the charges are a little bit overwhelming. For the most part, the main accounts are free if you hold funds but if you want to hold shares, Investment Trusts, Gilts, Bonds or ETFs there are dealing fees starting at £11.95 per deal and reducing if you trade regularly.
There is also a custody fee on shares which depends on the type of account you are opening. The rate is 0.5% of the amount you hold, but this is capped at different levels say at £45 a year for an ISA and £200 a year for a SIPP. Again, work out what you need and cost it out for you – every client is going to be different.
There is no doubt that HL are still operating on the rebate from fund providers model, like BestInvest. HL have lobbied very hard to waylay the proposed changes to platforms which will remove this as an option, probably from next year, but they have not succeeded. This means that in due course, their charging model will have to change too. As massive as Hargreaves Lansdown are though, I’m sure they’ll come up with something competitive.
4 – Fidelity/IC Direct
The Fidelity platform is in many ways a bog-standard one. It doesn’t particularly stand out from the others. It has a good range of wrappers including Junior ISAs, Junior SIPPs and such like.
There are tons of funds available, and shares too, plus ETFs and Investment Trusts. Their fees are quite reasonable, but again, unless you identify what your specific costs will be, it is hard to compare one platform from the other. They operate the rebate model for the most part which again, will have to change in the future.
The reason I mention Fidelity is that there is another site which uses the Fidelity platform but which has some important differences.
IC Direct is the brainchild of Martin Bamford of Informed Choice, a firm of Chartered Financial Planners in Cranleigh, Surrey. They have worked with Fidelity to ‘skin’ their platform and add an interesting layer of social interaction on the top.
They have also come up with a fantastic charging structure, which unlike some of the others, only an idiot would fail to understand. There are two cost. One is the cost of the funds you buy. They are all clean funds so there are no kickbacks going to Fidelity.
Then there is the platform fee of 0.45% of your investments. Of this, 0.25% goes to Fidelity and the 0.2% to IC Direct. That’s it. There are no switching charges or exit charges or anything.
Currently, the platform only offers a GIA and an ISA – no pension yet but one is apparently coming soon. I imagine that this will have a clean fee attached to it – pensions are complicated beasts – but I don’t know this yet.
I like the social aspect of IC direct. It is possible to share your portfolios with other users. You can build ‘fantasy’ portfolios and backtest them to see how they have done. You can look at other people’s portfolios (just the choice of funds, not their actual account, obvs) and see how that is performing.
There are research tools and a blog of course. IC Direct is quite new, having only been launched in March 2013. It needs to gain some traction, but I really like it and it deserves to do well. It’s a novel take on the self-investing platform idea, with the weight of Fidelity behind it, which is reassuring.
So you can see that there are a wealth of options available to you as investors and that each option has its own pros and cons. You need to clearly identify what you want out of the investing process and pick the platform that will best suit you.
In researching this session I came across a grew thew resource called indeasforinvesting.com. This is a site put together by the experts at the Platforum. They are well known to me as experts in adviser platform research, but this is their first foray into consumer platform research. It has been well done and the site is begin continually updated. I urge you to bookmark it and return to it if you’re planning to self-invest using one of these platforms. You won’t find better research out there.
Remember to let me know how you get on, and if you have any experience of using these platforms, please do let the community know how you got on by leaving a comment below.
This week’s reviews
Three new reviews this week, which is brill: The first from Andrew Hart who is a fellow adviser and fellow technology geek:
“A great podcast from a forward-thinking financial professional. Also great videos online. Thank you Pete.”
Thanks Andy – I appreciate you taking the time to do that. Nest up is Belfast Scott who writes:
“This is the best UK based money podcast I’ve found. A friend introduced me to the American Dave Ramsey in an effort to help me sort out my debts. I’ve recently busted my first debt following his advice and I was looking for a more UK based guide for how to move on. Well I’ve certainly found it in the MeaningfulMoney podcast”
Thanks so much Scott and well down on clearing your debts. That puts you in an exclusive club and puts you on a sound footing for the future. You’ve worked hard to get where you are – keep going! Finally Ruth says:
“Brilliantly distilled Pete. Follow this to-the-point advice and a secure future is assured”
Thank you Ruth. It’s so humbling to be honoured by colleagues in the profession, and I’m glad the podcast is helpful to people.
If you want to leave me a review you can do so at meaningfulmoney.tv/iTunes
Remember I reported a record week for downloads last week? Well, I busted through that again this last week and for the first time the podcast was downloaded more than 2000 times in a week. That’s incredible to me – thank you all.
This session is being recorded in my office, having moved my recording gear there and out of my house in preparation for my house move next Monday. Still no word on whether we’ll be in the new place before Christmas, but if you could all send out positive thoughts/prayers/crossed fingers I’d appreciate it!
That's it for this session of the MM podcast, I hope it was helpful. Do you have any questions or comments? If so, please leave them below.
I hope you enjoyed this session. Next time we'll be celebrating Financial Planning Week and covering 7 reasons to use a financial planner.
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