Mixed blessings of the internet

Brokers have rushed to set up websites, but costs for most funds have yet to come down
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The internet is an electronic paradise for bargain hunters. CDs, computers, books, wine, holidays, cars are all sold at hefty discounts via websites. But when it comes to investments, the discounts are few and far between.

The internet is an electronic paradise for bargain hunters. CDs, computers, books, wine, holidays, cars are all sold at hefty discounts via websites. But when it comes to investments, the discounts are few and far between.

Investors who want to put money into the stock market, either directly or through a product such as a unit trust, will find plenty of valuable information online. Most fund management groups now have websites with performance statistics, information on their investment philosophies, history and interviews with the managers. The smarter sites have electronic application forms and some even allow investors to move money between funds at the click of a mouse.

This summer has seen a rush by stockbroking companies to embrace the web. From just a handful of online brokers at the start of the year, the number of companies offering net-based trading has grown so much that there is now real choice and the cost of buying or selling shares has fallen as low as £5.

Last week Halifax became the latest, and so far cheapest, company to offer share dealing. Halifax ShareXpress is offering trades for £5 until mid-January. After that the charge rises to £12.50 for trades up to £2,500 and £22.50 for larger deals.

Halifax's move is the latest in a net price war that has driven the cost of dealing in shares down to about half the cost of using a phone-based broker. The cheapest deal on the market, excluding special offers, is with Barclays Stockbrokers, with a 1 per cent charge but a minimum of £11.99. E*Trade charges £14.95 for trades under £1,500, or on any amount for frequent traders doing more than 25 deals.

"The low entry tariff means that smaller investors are catered for," says Julian Costley, managing director of E*Trade. "Electronic broking is much simpler to administer: we have elected to allow people to apply online, hold stock in a nominee account, and open a direct debit online."

Shaving administration costs and reducing the number of dealing errors mean that online stockbrokers can cut charges to the bone. They have little choice: there will be at least a dozen companies offering internet share dealing by the end of the year.

Brokers' commissions are a relatively transparent cost. Commissions and charges are rather harder to identify for collective investments, especially unit trusts. There, investors have to allow for up-front commissions, annual management charges and the spread between the buying and selling costs of the units in the fund. The fact that a large percentage of unit trust business goes through independent financial advisers adds another layer of complexity.

So far, only a handful of fund management companies seem to appreciate the full potential of the internet, even though the scope for savings is considerable. The Government has even made the process easier by allowing investors to open individual savings accounts (ISAs) over the net without the need for a paper application or physical signature.

Fidelity is one of the most internet-aware of the large fund management groups. The company supports online applications, and its website gives investors a high level of control over investments. The company also offers occasional discounts for investors - currently, there are reduced initial fees of 2 per cent for several funds including IT and telecommunications -- but otherwise its charges are in line with other fund management houses. "We tend to use the internet to promote specific funds, although 30 per cent of our online ISA applications are new to Fidelity," says Tristan Brandt, senior manager for electronic channels. Prices for managed funds will fall, he suggests, as more companies enter the market. But for now the scope for discounting is limited.

"In managed funds, the back office is not automated, so cutting costs is difficult," he says.

Tracker funds, with their low management charges, ought to offer more scope for discounts. The specialist tracker fund company, NetISA (formerly NetPEP) is only sold through the net. Other popular trackers, such as those from Virgin or Legal and General, cost the same bought over the net or over the phone.

Internet experts believe that there are simply not enough people investing online to force financial companies to offer meaningful discounts. "It will take time for cost savings to show through, and it will depend on the take-up of online investment in the UK," suggests Alan Griffin, finance channel director for AOL UK, the internet service. "Savings will initially come in banking and in share trading, but technology and competitive markets will mean cheaper pricing."

John Blowers, managing director of the personal finance website Interactive Investor, agrees that there are still few examples of meaningful discounts. But he believes they will come. Financial services companies need to link with websites that generate traffic. In turn, Mr Blowers suggests, this will give popular websites the power to negotiate better deals on behalf of their users. "Websites will be able to ask the product providers for deals that are internet friendly: simple and convenient to buy on the net," he says.

Investors can make use of all the research facilities the net has to offer. Information that was expensive or only available to professional brokers and financial advisers is now on the internet, free of charge. Sites such as Interactive Investor and Money- world have stock portfolios and information, including performance tables, for unit and investment trusts. MoneyeXtra is a good source of comparative prices and interest rates for a range of financial products from a basic savings account upwards.

Hemmington Scott's valuable range of company information is accessible, much for no charge, on the company's website or through its free internet service provider arm. Free quotes gives real time share prices to subscribers of its associated internet service provider, themutual.net. Sites such as UK Invest and FT.com have good investment information and articles. Investors who make full use of the internet will be better placed to manage their own finances, saving money on commissions and financial advice.

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