Investment platform competition heats up – what it means for your fees
As competition in the retail investment platform market increases, many services are reducing their fees to entice more customers and keep up with their rivals. How can you benefit?
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.
Hargreaves Lansdown announced a cut to its headline annual platform fee from 0.45% to 0.35% from 1 March earlier this year.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Why are investment platform fees changing?
In the past, most people tended to make their investments through their bank, which acts as a broker.
But in recent years, there has been a rise in the popularity and availability of online – often app-based – investing platforms (sometimes called ‘neobrokers’).
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.
This includes eToro, which first entered the UK market in 2013 and was one of the first investment platforms in the UK to offer commission-free trading (within a trading or general investment account: fees apply to trades made in its stocks and shares ISA).
“People are taking control of their own financial freedom going forward, [and that] has led to more people using neobrokers in order to trade,” eToro’s managing director Dan Moczulski told MoneyWeek.
He believes the Covid pandemic in particular led to people feeling more comfortable using technology to invest than they did in the past.
Engaging with customers digitally like this reduces the costs involved for brokers.
“There becomes a virtuous circle where we have more clients, and it becomes easier to facilitate their business,” said Moczulski.
The growth of neobrokers 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 Moczulski.
Investors look set to benefit, as increased competition between providers ought to continue to push platform fees down over the long run.
How can you take advantage of lower platform fees?
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.”
