A host of major investment platforms have reduced their fees in recent months, as they compete for market share and technology brings the cost of serving customers down.
Investment platform Vanguard – which has a reputation for offering low fees – cut the fees applicable to its FTSE All-World UCITS ETF (LON:VWRP) from 0.19% to 0.14% in late July.
Hargreaves Lansdown cut to its headline annual platform fee from 0.45% to 0.35% from 1 March earlier this year.
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In December, Interactive Investor (ii) released a new pricing plan, which saw flat fees reduced on most accounts depending on their size (though some fees increased) from February.
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Meanwhile, AJ Bell has removed fees on ISAs and Lifetime ISAs in its Dodl app for the next year.
Freetrade, a neobroker that offers commission-free trading, announced in January that it was offering ISAs and Sipps for free through its Basic plan.
Why are investing platforms reducing their fees, and how can you take advantage of the trend?
What do lower investing fees mean for you?
Small changes in the fees you pay on your investments might not sound consequential, but they can have a significant impact on your wealth over the long term – largely thanks to the impact of compounding (where interest is gained on interest).
Investing platform Lightyear, which charges no platform fees besides a 0.1% currency conversion fee for non-sterling-denominated funds, calculated the effect that the fee cut on Vanguard’s FTSE All World tracker ETF would have on long-term investors.
Assuming the average annual contribution of £7,594, increasing by 2% annually, and 5% annual growth, the fee cut – at face value, a paltry 0.05 percentage points – would leave the average ISA investor £3,114 better off after 25 years, according to Lightyear’s analysis.
“The beauty of long-term investing is the compounding effect: earning returns on your returns, so your money grows on an ever-larger base,” said Wander Rutgers, UK CEO of Lightyear. “But compounding happens to fees too.” Over time, the eroding effect of fees on your wealth adds up too.
Lightyear also calculated the impact that platform fees themselves have over long-term returns. Five popular investment platforms’ fees were included in the analysis, ranging from AJ Bell and Barclays at 0.25% to MoneyBox at 0.45%.
Choosing the most expensive platform (MoneyBox) would mean the hypothetical average investor above would pay a total of £24,914 in fees over 25 years. The investment growth lost to fees over this period would cost a further £11,565, meaning this hypothetical average investor would have lost a total of £36,479 thanks to fund and platform fees over this period, according to this analysis.
“If we look at the same investor activity – same contributions, same purchases, same growth rate – and the only thing that changes is the platform, after a few years the difference in the portfolio amount might seem insignificant,” said Rutgers. “But let twenty five years pass … and you might have lost tens of thousands of pounds, purely because of your chosen provider’s fees.”
A fee-free platform would bring these combined costs down to £8,861 over the same period (assuming the 0.14% annual fund fee on the Vanguard fund) according to Lightyear’s analysis.
So the fees your platform charges matter: in this example, the impact of the most expensive investment platform fees was around 9x the impact of the fund fees themselves.
All brokers have to charge fees in order to make money. Most will charge you either a flat fee or a percentage fee, the size of which typically depends on how money is in your account.
In the past, most people tended to make their investments through their bank, which acted as a broker.
In recent years, the growth of neobrokers (online and often app-based investing platforms) charging lower fees has forced many of the industry’s more established players to reduce theirs in turn.
“A lot of the more traditional players have had to say, ‘If we want to compete with this new wave of brokerages, we've got to change our pricing,’” said Dan Moczulski, managing director at investing platform eToro.
Investors look set to benefit, as increased competition between providers ought to continue to push platform fees down over the long run.
One of the most important steps to take is to always check the fees your investment platform is charging, and to compare the available options when opening an account. According to research from ii, only 10% of investors regularly take this step.
“While it’s encouraging to see that more investors are starting to check the costs associated with their investments, the vast majority are still in the dark and therefore unaware that they might be paying over the odds,” said Camilla Esmund, senior manager at ii. “Over the years, these charges could be eating into their money when it should be benefiting from the long-term magic of compounding.”
There are advantages to switching your platform provider. As well as lower fees, lots of platforms offer bonuses for transferring your ISA or Sipp into a new account.
Besides costs and charges, there are several other things to consider when choosing an investment platform:
Investment selection. Not all platforms offer the same selection of investments. Check that the platform you’re considering offers the investments you want, and if you’re transferring an existing portfolio, check if it offers all your current holdings (if not, you’ll have to sell those positions down and transfer cash).
Service and account management. Lots of neobrokers offer customer support exclusively via email or the app. That’s fine for some people, but check the platform you’re considering suits your needs.
A platform’s resilience. When you move tens or hundreds of thousands of pounds between financial institutions, you want to have some confidence that their technology is robust and their finances are sound. While there are protections from the FCA and FSCS that are intended to provide a safety net for retail customers, not all platforms are at the same stage of development.
“Some may be part of a large, listed group, while others may be loss-making startups reliant on outside funding, or private businesses saddled with debt,” said Alex Campbell, head of external affairs at Freetrade. “These may sound like more wonky concerns, but it’s important to think about when you’re handling your life savings.”
