Flat fees vs percentage fees - are you paying too much for your investments?

Choosing the best investment platform for you can be tricky. You need to look at the investment range, customer service, functionality like whether it has an app, and of course, the fees.

But comparing platform charges is challenging and can be downright bewildering, but they are important as they can eat into your returns.

Every platform has its own set of fees, which may depend on the size of your investment portfolio, and how often you trade (and what you trade). Some charge initial fees, annual fees, and/or exit fees. 

While most platforms charge percentage fees, a few levy flat fees. This makes comparisons even harder.

Is a fee that is charged as a percentage of your portfolio, or a fixed flat fee, a better choice for you?

In the lead-up to the end of the tax year, when many investors will be thinking about topping up their stocks and shares ISAs, we investigate the flat versus percentage debate, and reveal some fascinating cost comparisons.

Which investment platforms charge flat fees?

Most investment platforms charge an annual fee that is expressed as a percentage of the investor’s portfolio. So if you have £50,000 in an ISA, and the annual fee is 0.45%, you would pay £225 a year.

The more you have invested, the greater the fee.

In contrast, a few platforms charge flat fees. Interactive Investor has several different price plans, which all have flat fees. The cheapest is £59.88 a year and can be used for portfolios containing less than £30,000. Above this level, the cheapest flat fee is £119.88 a year. 

It argues that its fees are “flat and predictable” and can be significantly cheaper than its competitors that charge percentage fees.

Meanwhile, IWeb, which is owned by Lloyds Banking Group, charges a flat fee of £100 to open an account. It doesn’t charge any annual or ongoing fees. Trades cost £5 each.

Halifax Share Dealing charges £36 a year for a stocks and shares ISA, plus £9.50 for each trade.

Platforms that charge percentage fees

The rest of the big investment platforms charge percentage fees. Some have a tiered scale, so the percentage fee drops the more money you have in your account. It may also vary depending on what you invest in. 

For example, Hargreaves Lansdown charges 0.45% on ISA portfolios worth up to £250,000. Any money between £250,000 and £1m has a fee of 0.25%, between £1m and £2m attracts a fee of 0.1%, and anything above £2m has no charge.

These fees apply if you’re investing in funds. If you’re buying shares, the fee is 0.45% regardless of the size of the portfolio, capped at £45 a year.

AJ Bell has a similar model. It charges 0.25% for ISA portfolios that only invest in funds, reducing to 0.1% on the value between £250,000 and £500,000, and then no charge for money held above £500,000. 

For portfolios that invest in shares (including investment trusts and ETFs), the annual fee is 0.25%, capped at £3.50 a month.

We told you platform fees were complicated, and tricky to compare!

Cost comparisons

We asked the consultancy The Lang Cat to crunch the numbers for us to try and show a meaningful comparison of the costs of different-sized portfolios.

Will a platform with a flat fee or a percentage fee be crowned the cheapest?

The below table shows 14 popular platforms, and compares portfolio sizes ranging from just £5,000 all the way up to £1m. 

The costs are for investing on the platform for one year, including ongoing platform fees, any additional wrapper charges, opening fees, and the fees for making 12 trades (buys or sells) in funds.

Source: The Lang Cat

The green boxes highlight the cheaper fees, while the costs in red are the most expensive.

So, for a £5,000 ISA - and assuming the investor makes 12 investment trades in a year - the cheapest platform is Vanguard, with a fee of just £8 a year.

Vanguard is also the cheapest platform for a £15,000 ISA (£23 annual fee), £20,000 ISA (£30) and £25,000 (£38). 

Vanguard charges a low percentage fee of 0.15%, and there are no charges to buy or sell funds.

Moving up to larger investment portfolios, Halifax Share Dealing is the cheapest for a £50,000 ISA, with an annual fee of £60. 

In fact, due to its flat fee, the annual cost for any sized stocks and shares ISA with Halifax is £60. If you’re lucky enough to be an ISA millionnaire, you would still pay just £60 a year for your portfolio. 

This means Halifax is the cheapest platform for portfolios ranging in size from £50,000 to £1m. Investors with portfolios that are smaller than £50,000 would potentially pay less with Vanguard.

In other words, a percentage fee (Vanguard) is cheaper for the smaller ISAs, and a flat fee (Halifax) is cheaper for the larger ISAs.

At what point is a flat fee worth it?

Let’s look more closely at some of the other platforms that have low annual fees in our table.

The cheapest platforms for the smallest portfolios (£5,000, £10,000 and £20,000) all have percentage fees: Vanguard, Close Brothers, Charles Stanley Direct and Santander.

At £25,000, the platforms charging flat fees start to become more competitive. While Vanguard is still the cheapest (£38), Halifax Share Dealing isn’t much more expensive (£60), and Interactive Investors’ “Essentials” pricing plan has the same £60 price tag.

At £50,000, Halifax (which has a flat fee) becomes the cheapest platform. Vanguard (percentage fee) is second cheapest, at £75.

At £100,000, the two cheapest are both flat-fee platforms: Halifax and Interactive Investor.

From the Lang Cat data, it seems the tipping point where a flat fee works out as more cost-effective is for portfolios that are between £25,000 and £50,000 in size.

Mark Locke at the Lang Cat tells MoneyWeek that flat fees are becoming more competitive. He says a flat fee used to be much more expensive than a percentage structure on smaller portfolios. But now with Interactive Investor’s Investor Essentials plan - which launched earlier this month, and works out at about £60 a year (and is only available on portfolios worth less than £30,000) - the gap is getting smaller.

He adds that with investment pots greater than £100,000, the difference between a cheaper flat-fee structure and a more expensive percentage structure can run into tens of thousands over the lifetime of the account. “So if keeping investment costs down as your investment grows is your top priority, flat fees are impossible to dismiss.”

Justin Modray from Candid Financial Advice and the comparison site Compare Fund Platforms, says “fixed-fee platforms are usually much better value for larger portfolios unless you are an avid trader”, adding that “in general they tend to make sense for ISA portfolios of around £50,000 and above, the level increasing with how often you are likely to buy and sell funds.”

He thinks flat fees are a much fairer way for platforms to charge, “given they’re an administrative service and the work involved doesn’t tend to rise with the value of your portfolio. However, they are the exception not the norm, suggesting percentage fees are probably more profitable for platforms.”

What’s the best fee structure for large portfolios?

Clearly, the larger the investment portfolio, the higher the fee will be with a platform that has a percentage-fee structure.

Some platforms have sought to reduce the impact of a percentage fee on big portfolios with lower percentage fees for large values.

However, the table shows that investors with ISAs worth £100,000 or more could pay hundreds - or even thousands - of pounds in extra charges for choosing a percentage platform rather than a flat-fee competitor.

At £100,000, an investor could pay just £60 with Halifax, or £450 with Hargreaves Lansdown. At £250,000 the cost of choosing Hargreaves rises to £1,125 a year, then £1,750 for portfolios of £500,000, and then £3,000 for £1m portfolios. Meanwhile, the cost of having your ISA with Halifax remains at £60 a year, even for a £1m portfolio. 

According to Interactive Investor, which is the second-cheapest flat-fee platform for larger ISA portfolios, a percentage-fee platform can be more than 10 times more expensive for accounts worth £500,000 than its own platform.

It says the difference between flat fees and percentage charges can be “jaw-dropping”. It adds: “The more your pot grows, the worse the percentage charges can bite.”

What else do I need to consider?

While fees are an important factor when picking a platform - high fees can seriously erode your returns over time - they should not be the only factor.

For example, Vanguard may be the cheapest platform for small ISA portfolios, but investors can only choose from Vanguard funds. If you chose a slightly more expensive platform like Charles Stanley Direct or Halifax Share Dealing, you would have a much wider investment range.

Meanwhile, you may wish to consider other features, such as whether the platform has an app, whether it offers other products like a Sipp or a junior ISA, and whether it pays interest on cash balances.

Jason Hollands, managing director of Bestinvest (which charges a percentage fee), argues that while investors care about fees, “their real focus is value-for-money”. 
He says investors should look closely at the service they receive for the fees paid. For example, with Bestinvest, customers receive free coaching sessions with qualified financial planners and “a wide range of low-cost managed portfolios that are substantially cheaper than many so-called ‘robo-advisers’.”