Don't pay more than necessary for a broker's investment advice

There are ways to reduce costs, says Iain Morse. And free advice is available from good brokers

If you invest into a tax-free individual savings account (Isa) before the tax year ends on 5 April, think about how much you will pay in up-front charges. Buy through a commission-based independent financial adviser (IFA) or "off the page", direct from an Isa provider, and you can pay as much as 6 per cent of the cash sum you first invest. On £7,000 this equals a hefty £420. The fund has to grow that much before you break even on your investment.

If you invest into a tax-free individual savings account (Isa) before the tax year ends on 5 April, think about how much you will pay in up-front charges. Buy through a commission-based independent financial adviser (IFA) or "off the page", direct from an Isa provider, and you can pay as much as 6 per cent of the cash sum you first invest. On £7,000 this equals a hefty £420. The fund has to grow that much before you break even on your investment.

These charges come out of the bid/offer spread on unit trusts, or the difference in price at which you buy and redeem units from a particular manager. Such charges do not apply to share or investment trusts. Most unit trust Isa providers pay commissions to intermediaries ranging from 3 per cent to 5 per cent of the amount invested.

But, even without commission, many Isa providers still impose a bid/offer spread and take your money for answering their advert. This can seriously damage your wealth over the medium to long term. The cash difference between investing £7,000 over 20 years free of initial commission, or with a start-up cost of 5 per cent, is more than £1,500.

"In both cases this is on an assumed total return of 8 per cent," Anthony Yagdaroff, of the discount broker Allenbridge, says. "Such charges might not have mattered much in the booming 1990s but now every penny counts for investors and the consensus is that equity markets are going through a period of slower growth."

Discount brokers such as Allenbridge, Best Invest and Ample offer to reinvest some or all of these start-up commissions for investors. Wary people may wonder where discount brokers make a living if they do not take up-front commission. The answer lies in so-called "trail commission", normally set at 0.5 per cent of the Isa fund's value.

Trail commission is included in the Isa provider's annual management fee and cannot normally be repaid to or reinvested for the investor. Most unit trust Isas carry a 0.5 to 1.5 per cent total annual management charge. Investment trust and share Isas tend to have lower charges, but investment trusts offer less investment choice and share Isas require more decisions from investors.

Commission-based IFAs say investors need advice about picking an Isa best suited to their needs. Justin Modray, an investment adviser at Bestinvest, says: "Unit trust Isas are retail products designed to fit particular investor needs: growth, income, a combination of both and so on.

"Much of the information on these comes from the providers, not the IFAs, who merely repeat it. Ask what real value the IFA adds for his up-front commission and decide if you can afford to pay it."

Brokers such as Allenbridge and Bestinvest publish much of this research free.They also provide proprietary research on topics such as relative fund performance and the arrival or departure of star fund managers. One of the best Isa guides, Isa Direct, comes free from Allenbridge and you can download it from its website or request a copy by post.

Bestinvest and Ample offer free data, including best-buy lists. You do have to be a bit of an anorak to bother reading the finer detail of some of this research. But much of it is free, save that of trail commissions, which you will pay anyway. And because it is not paid out of up-front commissions this research may be more objective than that of commission-based IFA.

Discount brokers also offer access to a funds warehouse or supermarket. The two largest in the UK are Fidelity's Fundsnetwork, accessible to retail investors, and Co-funds, set up for the clients of IFAs. These should not cost anything and allow transfers from one Isa manager to another simply, without a lengthy process of redeeming units, receiving a cheque then reinvesting the money. Transfers can be made directly between fund managers within the same Isa wrapper. Discounts on up-front commission may also be available.

'You can get what you need' from discount brokers'

Anne Charlton, an office manager, has built up an Isa and Pep portfolio with retirement in mind. "I use a discount broker only when I'm investing into an ISA, because initial charges have such an impact on long-term performance. Why pay them unless you really need advice from an IFA?"

Ms Charlton, 51, feels the tax implications of an Isa need little explanation , and matters such as investment risk can be dealt with if you take the trouble to do a little of your own research.

"Nowadays, the likes of Fidelity sell Isas that are designed to reduce risk as the investor approaches retirement age," she adds. "Two key issues for investors are fund volatility relative to their peer group and asset allocation, or having a balanced portfolio. But you can get much of what you require for this from discount brokers, so why pay more?"