If you invest in ‘open-end’ funds (such as unit trusts), we have good news – your costs are likely to drop over the next few years. That’s because the ‘trail commission’ payments made by fund managers to brokers (which ultimately come out of the money you’ve invested) are being banned.
Instead, brokers will charge you directly for looking after your money, and this will be both more transparent and less expensive than paying the broker indirectly via commission. It’s about time – as we’ve often noted here at MoneyWeek, unit trusts have rarely represented the best-value way to invest.
But if you – like most of the MoneyWeek team – prefer to buy stocks, exchange-traded funds (ETFs) and investment trusts, the news isn’t as good. Even as they cut charges for holding the likes of unit trusts, many brokers have raised fees for other investments. So why are costs going up – and where can you still get a good deal?
What brokers charge you for
Clearly, one reason that brokers have hiked fees for holding and trading shares is because they’ve taken a hit on the money they make from holding funds. But this is just one of many factors, according to brokers interviewed for this piece.
Rising regulatory costs – such as tougher anti-money-laundering rules – as well as higher charges from the third parties brokers have to deal with, have squeezed firms. A fall in trading volumes has hit brokers whose income depends largely on dealing commissions.
Lower interest rates have hurt too: the gap between the interest brokers can earn on investors’ cash deposits, and the interest they pay to clients has long been a significant source of revenue for some. With rates at rock-bottom, that income has fallen sharply.
The investors hit hardest by the new fees are in many cases those who buy and hold stocks, ETFs, or investment trusts, and trade infrequently. If you’re among them, you can be forgiven for feeling victimised – surely a low-activity account shouldn’t cost much to run?
Brokers say this isn’t true – as well as bearing a share of general overheads, an inactive account still creates costs for dividend handling and processing corporate actions. And while ongoing external costs, such as custody fees, are low for UK stocks, they can be more significant for international markets.
Brokers in Britain have tended not to charge explicitly for these services, preferring simpler ‘all-in’ fee structures. Instead, costs have been covered by trail commission, interest on cash deposits, dealing commission and administration fees.
But the first two are in decline, while years of competing on dealing rates mean there’s little fat left there – once frequent trader rates are thrown in, the average commission on an online UK equity trade is around £7.50 to £8, says Foster Bowman, managing director of iDealing. Efficient firms that do their own trade settlement can still make money at that level, but there’s little profit margin across the industry as a whole.
Raising headline dealing rates would be unpopular, so brokers trying to defend margins must either turn to administration fees or charges that investors often overlook, such as currency conversion commissions.
What about charges for tax-efficient ‘wrappers’, such as individual savings accounts (Isas) and self-invested personal pensions (Sipps)? Tax office monitoring and reporting requirements on an Isa mean overheads are a bit higher than for an ordinary ‘unwrapped’ dealing account.
But having no administration or inactivity fees for both Isas and dealing accounts is realistic and encourages investors to use the Isa tax break, says Steve Lawrance of AJ Bell Youinvest.
However, Sipps are more labour-intensive and costs rising due to regulation. His firm was for a long time the only administration-fee-free Sipp in the market, but it has recently introduced a quarterly charge to help cover costs.
How to get the best deal
We’ve gone into quite a bit of depth here on costs for two reasons. Firstly, it gives you a better idea of where your money is going when you choose a broker. Secondly, it seems clear that broker charges are unlikely to fall overall for the types of investments we favour, and that low-activity users are likely to pay more as administration and custody fees become more common.
But that certainly doesn’t mean that all brokers are charging a fair price – many of the biggest providers look uncompetitive. So if you’ve been hit by new charges (perhaps you’re holding investment trusts with Hargreaves Lansdown, for example), then shop around for a better deal elsewhere.
No single firm is best for every investor, but as a new home for your stocks, ETFs and investment trusts portfolio, those in the box are worth investigating.
The best deals
For a relatively basic service with cheap UK trades (£5 a deal), iWeb (Iweb-sharedealing.co.uk) is popular; it charges no fee for a dealing account or an Isa. AJ Bell Youinvest (Youinvest.co.uk) also charges no Isa fee and is the lowest-cost Sipp option for most stock portfolios, at £5-£25 per quarter, depending on portfolio size.
iDealing (Idealing.com) offers competitive commissions across a wide range of instruments, including futures, options, contracts for difference (CFDs) and spread betting, as well as stocks and bonds. The absence of a large currency mark-up also makes it good value for US and European shares.
Interactive Brokers (Interactivebrokers.co.uk) charges a $10 a month minimum commission, but has competitive rates and very low currency costs.
However, its rather complicated platform means it’s best for experienced investors.
Lastly, while Stocktrade (Stocktrade.co.uk) is more expensive than the other firms mentioned above, it offers some of the flexibility of a traditional stockbroker at lower cost, and may suit investors with larger portfolios.