Are you paying too much for your stocks and shares ISA?

ISA investment fees are coming into focus as the tax year ends.

Many investors will choose the best investment platform for their stocks and shares ISA based on asset choice, research tools, functionality and even ISA transfer cashback offers, but charges are also important.

The cost of investing is becoming a bigger factor when choosing the best stocks and shares ISA as many active managers are failing to outperform the markets, causing a flight to passive funds.

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Investors are also increasingly favouring exchange traded funds, letting them track currently rising markets such as the S&P 500, which has been boosted by the success of the Magnificent 7.

Share trading can be more expensive on larger and more popular investment platforms, creating an issue for ISA investors relying on the bigger players for their portfolio.

Analysis by new ISA market entrant Lightyear claims stocks and shares ISA holders are paying more than £800 million extra in “unnecessary account fees," when only holding stocks and ETFs, which can eat into their returns.

Stocks and shares ISA costs

The traditional charging model among investment platforms is an annual percentage fee based on the value of your portfolio or flat fees.

But a new cohort of app-based investment platforms such as Lightyear, Freetrade and Trading212 let users build an ISA portfolio on their smartphone and only charge low trading fees.

These providers focus on a range of equities and exchange traded funds rather than mutual funds and other assets.

Analysis suggests investors focusing on shares and ETFs could be better off with the smaller providers compared with better-known brands.

For example, Lightyear charges £1 for UK stock trades compared with investing platform giant Hargreaves Lansdown, which charges between £5.95 and £11.95 depending on the number of trades.

Lightyear doesn’t have a annual fee while Hargreaves Lansdown charges 0.45% per year with a £45 cap when holding shares.

Capital Economics was commissioned by Lightyear to compare its fees based with other ISA platforms.

It looked at investing costs when making the average ISA investment of £7,355, rising by inflation each year, with annual growth of 5% as well three US stock trades and three ETF trades annually.

The analysis suggests Lightyear would be almost £400 cheaper for investors than Hargreaves Lansdown after a year and around £7,000 cheaper over 25 years.

In another example, Moneybox, which offers risk-rated ISA portfolios of shares, ETFs and index funds, for a £1 monthly subscription fee and 0.45% platform fee, works out £250 more expensive after a year and around £27,000 more over 25 years, according to the research.

When compared with other app-based platforms, Trading 212, which only charges a forex fee and is commission-free, actually comes up £581 cheaper over 25 years.

However, Freetrade, which charges £4.99 per month for its stocks and shares ISA, shows as more expensive.

Wander Rutgers, UK chief executive of Lightyear, said: "People across the UK are being marketed to left, right and centre at the moment with ISA offers that look enticing on the surface; of course 1% cash back on transfers sounds good, but that same provider is also taking 1% of portfolio value back every single year in a custody fee, hidden deep within their pricing page. These fees are normally taken from your portfolio, so they’re very easy to miss…

“The stocks & shares ISA market is a complete lottery: most of us follow the herd and sleepwalk into this lottery by opening an ISA with one of the incumbent banks or brokers, accepting whatever fee we’re hit with. This money goes straight into the pockets of the providers, instead of to us. There's a huge inertia to leave, and that inertia is costing people a huge amount of money.”

The importance of shopping around

As with any sort of financial service, it is important to shop around and find the investment platform that best suits your needs.

Lightyear may be low cost but it doesn’t provide the full range of features such as other investing assets including mutual funds and research tools that you get with other providers so investors need to decide if these are worth paying for.

A spokesperson for Hargreaves Lansdown said: “One in three UK investors use Hargreaves Lansdown, making us the UK’s number one platform for private investors.

“Our clients tell us they highly value the full-service offering: the security of a trusted brand, the breadth of proposition and wide range of investment choices, fund discounts, as well as access to our quality and personal client service."

A spokesperson for Moneybox added that its platform fee is in line with industry standards, adding: “Our stocks and shares ISA offers a wide range of investment options—whether customers prefer expertly designed portfolios or want to build their own with tracker funds, exchange traded funds (ETFs), and individual US stocks. We also provide valuable tools and educational content to help our customers improve their financial literacy, become more confident investors over time and make informed financial decisions.

“Our platform fee is in line with industry standards, and we don’t charge trading or commission fees on US stocks. While some providers may currently offer a lower-cost structure, some investors may also want to consider whether that approach is commercially sustainable in the long term. Moneybox is committed to providing a stable, predictable pricing model so that we can continue to support our customers for years to come.”