How will new rules affect fees on investment platforms?

published 21 January 2014

Fund supermarket Hargreaves Lansdown has overhauled its charges. New rules (under the Retail Distribution Review) mean that investment platforms such as Hargreaves Lansdown (HL) will shortly be banned from receiving trail commission from fund managers, when customers buy their funds through the platform.

As a result, customers will now pay an explicit fee to the fund manager, and a separate one to their fund supermarket.

As HL is such a heavyweight in the sector, with around 500,000 clients, the changes have been keenly awaited by both rivals and customers. So how does the new, more transparent pricing stack up?

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In summary, customers will now pay an annual fee of 0.45% on a portfolio value of up to £250,000, and less for assets above that. There is no minimum charge, no dealing fees for funds and no account charges for general accounts, Isas or Sipps.

This 0.45% is significantly higher than most peers, but the firm's clout means it has been able to negotiate lower-than-average annual management charges (AMCs) on many funds held through it, partly offsetting the difference.

For example, a fund manager might charge an AMC of 0.75% on the 'clean' (non-trail-commission-paying) share class of their fund held at most platforms, but a 0.65% AMC on the 'superclean' class held via HL. So the firm will not necessarily be more costly than its most high-profile peers (depending on the funds owned).

It can also legitimately claim that most investors will see total costs fall. The new fee, plus the AMC on clean share classes, will usually be lower than the AMC on the older commission-paying share classes (typically up to 1.5%). That said, HL has never been the lowest-cost provider in the market (for the average person), and this hasn't changed.

The cheapest way to hold funds varies depending on how you invest, but a number of alternatives are worth a look. Alliance Trust Savings is good for larger portfolios, charging £18.75 plus VAT per quarter on general accounts and Isas, and £155 plus VAT a year on Sipps. Buying and selling funds costs £12.50.

If fixed fees don't suit, AJ Bell Youinvest levies a 0.2% charge, capped at £50 per quarter. Fund purchases and sales cost £4.95. There's no further account charge for a general account or an Isa, while a Sipp is £5-£25 per quarter. Alternatively, Charles Stanley Direct has no fund dealing charges, with a custody fee of 0.25% up to £500,000 and 0.15% above. Its Sipp has an annual fee of £100+ VAT.

Lastly, iDealing has begun offering access to funds and will be very cheap if its more limited range holds what you need. The firm charges no dealing or custody fees on funds, treating them as a loss leader to round out its service.

It currently offers Jupiter and M&G, and will add more big groups this year. There is a £5 quarterly fee for general accounts and Isas; Sipps require a third-party administrator who will levy their own fee.

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.