Small investors hit by rising fund supermarket fees
Discount brokers' charges are reducing the options and affordability for individuals
Sunday 08 January 2012
When on your weekly shop at the local supermarket, you like to think there will be a wide range of goods in stock at low prices, in order to find the best deal. In the same vein, you'd hope fund supermarkets have a similar proposition when it comes to shopping for investments.
Instead of going direct to a fund management group who can charge initial fees of around 5 per cent as well as annual management fees of around 1.5 per cent for a unit trust, you can skip straight to a fund supermarket to save on these costs, with some scrapping the initial fee altogether while cutting the annual charge.
And if you don't need advice from an independent financial adviser, then going to an execution-only supermarket or discount broker can seemingly bring you the biggest savings.
But, despite being perceived as a panacea for cheap investing, some supermarkets have of late been adding extra charges, in some cases to justify offering funds which don't tend to pay them commission. For investors, this means it could cost you more to hold a small amount of money in some products such as tracker funds, which aim to reflect the performance of an index like the FTSE 100.
Hargreaves Lansdown, one of the largest fund supermarkets, has attached a flat-fee charge of up to £2 a month per share for investing in certain tracker funds, although this also applies to a few actively managed funds. Prior to this change, which came into force at the end of December, charges for tracker funds varied, from some having no fees to others costing around 0.5 per cent a year.
Ben Yearsley, an investment manager at Hargreaves Lansdown, says: "We've introduced the fee to offer clients a wider range of funds. Historically these trackers don't pay commission, so it's a case of being able to widen the service."
The supermarket is now offering a tracker fund range from Vanguard, with some of these funds charging as little as 0.15 per cent a year. However, the Vanguard trackers will incur the new £2 charge, and other trackers are also subject to the flat-fee of £1 or £2 per share a month, depending on the commission from the product paid to Hargreaves. For example, the Fidelity MoneyBuilder UK Index has a £2 fee and the Legal & General UK 100 index has a £1 fee. These new costs will hit those savers with less money invested harder than if they were being charged, for example, 0.5 per cent a year on their trackers.
On the positive side, though, supermarkets that are switching to charge flat-fees rather than taking a percentage of your investment mean customers can see what they are paying and where the costs are going, as part of a push spearheaded by the Financial Services Authority (FSA).
But another fee causing controversy is something called trail commission, a fee of around 0.5 per cent of the value of your funds a year, paid by fund management firms to IFAs and fund supermarkets, with the aim – in theory – of covering the cost of on-going financial advice. There are fund supermarkets which rebate this fee, either in part or in full, as they do not provide this advice. However, the FSA is banning the payment of on-going trail commission from 2013, making way for up-front fees for advice.
Mr Yearsley says Hargreaves Lansdown refunds, or provides an average annual "loyalty bonus", of around 0.25 per cent – or half the fee – and up to 0.5 per cent at most. Bestinvest also offers a rebate, or loyalty bonus, of up to 0.5 per cent a year, although this is only paid out if the value of your account, which can include that of others in your household, amounts to £50,000 or more, on the anniversary of opening your first account.
Adrian Lowcock, a senior investment adviser at Bestinvest, says the firm is also looking to turn this annual rebate into a monthly payment.
However, despite the shift towards trail commissions rebates, other firms still do not offer this payment, including Barclays Stockbrokers, which says it is looking to change this over the next couple of months.
In contrast, Alliance Trust offers a full rebate. Malcolm Dodds, its head of platform development, says: "Trail commission is rebated in cash, directly into the client's account. The client or IFA can then choose what to do with the rebate. It could be used to cover account charges, pay IFA fees, re-invest or can be withdrawn, where the product rules allow."
Even if you can get a rebate on this commission, there are other fees to consider. Investing in shares, investment trusts, exchange-traded funds, gilts and bonds can often incur a charge. Hargreaves Lansdown, for example, charges 0.5 per cent of your investments a year on these products, capped at £45 if you're investing through an ISA. In comparison, Bestinvest charges £12.50 every quarter plus VAT for holdings in ETFs, shares and those investments which do not pay an annual commission.
Indeed, some charges are based on how much money you save, as well as the type of investment you buy. Barclays Stockbrokers charges £30 plus VAT a year for up to £7,500 invested in funds via an ISA, which are not in the firm's Funds Market range. If you have more than £7,500 invested, the charge is £50 plus VAT. Alliance Trust Savings charges an administration fee of £25 plus VAT a year for investing in an ISA, although it offers one free online trade, for which it would normally charge £12.50.
One way to boost your returns is through dividend reinvestment, although this can also incur a cost and is not offered by some supermarkets. Alliance Trust charges £5 for dividend reinvestment, and Barclays charges 1 per cent of the value, or a maximum of £7.50. Hargreaves Lansdown allows for dividend reinvestment free of charge, and Bestinvest does not yet offer this service.
But this is not simply a case of comparing apples with apples, because there are other factors to consider when shopping around for the best supermarket, such as the number of funds available and what other services are included, such as access to comprehensive investment research, if this is something you require.
For those who are not confident investors, seeking advice from an IFA is a wise move. Martin Bamford, the managing director at IFA firm Informed Choice, says although going through a supermarket can seemingly help cut fees, trading charges can exacerbate your overall costs. For example, trading shares can incur a commission charge of up to £13 per online deal.
Colin Turton, a director at MarketWatch and AdviserAsset, says you can keep an eye out for charges each year, so that if there is a significant change in pricing policies or the value of your portfolio, it might be more efficient to move to another platform or supermarket. "But you also need to consider the functionality of the platform," says Mr Turton. "What do you need from a platform versus the relative charges – it's a judgement call."
He says look to see if the platform or supermarket has access to the funds you require, and if there is tax wrapper selection guidance, for example.
Emma Dunkley is a reporter at citywire.co.uk
- 1 Howard Jacobson: Let's see the 'criticism' of Israel for what it really is
- 3 Belgium fan Axelle Despiegelaere lands L'Oreal campaign after World Cup viral photo
- 4 Britney Spears sings 'Alien' without Auto-Tune in embarrassing leaked audio clip
- 5 PornHub begs users to stop uploading video clips of Brazil getting beaten 7-1
Sustained immigration has not harmed Britons' employment, say government advisers
Australia facing international condemnation after turning around Sri Lankans at sea
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
There’s a nasty smell in the political air – and it’s coming from the Tories
iJobs Money & Business
£12 - £15 per hour: Cameron Kennedy Recruitment: Excellent opportunity to join...
£400 per hour: Orgtel: Technical Business Analyst - Banking - Bristol - £400pd...
£38000 - £42000 per annum + competitive: Real Staffing: Required skills:Previo...
£60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...
Day In a Page
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay