Small investors: watch out for fee changes

We're generally thrilled by the coming introduction of the Retail Distribution Review (RDR), a wholesale change in the rules on financial advice that effectively prohibits the payment of commissions to financial advisers. From next year there will be a new transparency to the cost of most things financial. But one group of investors may not be pleased by the result.

While it isn't yet entirely clear whether the platforms through which most of us invest are going to be banned from taking trail commissions (an annual payment from fund management firms for every year their clients hold their funds), financial advisers are mostly assuming that they will be.

That means they're starting to change their charging structure rebating all the commissions to the client and putting in place flat fees instead. Most people should welcome this it makes charges transparent and comparable. So who isn't going to be pleased? Passive investors with small amounts invested.

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Take the recent changes from Interactive Investor (iii.co.uk). It's just introduced a new £20 quarterly fee for Isa and trading accounts and a £10 trading fee for fund purchases (the first two of which every quarter can be offset against the quarterly fee).

It's also (presumably in anticipation of RDR) introduced a 100% trail commission rebate. Previously there was no quarterly charge and no rebate (so the platform was paid directly from your investments). The net effect is that all customers (you can link accounts so you only pay once) must pay a minimum of £80 a year.

For some that will mark a discount. If you have a large portfolio, say £100,000, in which you hold active funds that were paying trail commission at, say, 0.25% a year, you were paying £250 on that alone. Now you aren't. But as Monevator.com notes, the results are rather more "grim" if you're a small passive investor.

Say you have £2,000 invested in passive funds. These tend to pay low trail more like 0.13%. So you're currently paying iii £2.60 a year (via the fund provider) in trail. That now goes up to £80, or 4% of the value of your fund. Add in trading costs and the management fee you're paying the fund providers and the odds of you making a capital return after fees are all but non-existent. It is, says Monevator, "just too much to give away".

So what do you do? You can buy direct from the provider rather than the platforms or you can move to a cheaper platform, such as TD Direct Investing. You might also take heart from the fact that as RDR moves on, competition should bring down fees. That is what generally happens when real transparency is added to an industry.