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Personal finance: Beware bargain basement deals on offer at fund supermarkets: Investment websites are cutting costs but, as David Prosser warns, it's far from simple and the cheapest may not be best for you

January 26, 2014

David Prosser

Any war has its casualties, and the price battle between websites on which investors can manage their money is no different: while some will see costs fall, others will face higher charges. Fidelity, which runs the UK's second biggest online fund supermarket, a service enabling investors to buy, sell and hold funds and other assets, is the latest to announce new charges - undercutting market leader Hargreaves Lansdown . From next month Fidelity will charge 0.35% a year for using its service, compared with the 0.45% most Hargreaves Lansdown investors will pay. Fund charges are on top, and at Fidelity these will average 0.64% a year, compared with 0.65% at Hargreaves Lansdown , although prices vary depending on the fund. These reductions represent savings for many investors - Fidelity says, for example, a typical investor putting pounds 10,000 into an Isa will pay just pounds 99 of charges a year, compared with pounds 175 previously. However, the different ways in which the dozens of fund supermarkets operate makes it difficult to compare like-with-like. It depends on the investments you pick, the size of your investment portfolio, and additional charges for services such as requesting a paper-based statement, with hidden fees to catch out the unwary. Why are these firms cutting charges? Mainly because the regulator, the Financial Conduct Authority , is forcing them to be more open. Until now, fund supermarkets have quoted investors a single annual charge for holding a fund with them - 1.5% a year, say. Some of that goes back to the fund manager, with the fund supermarkets pocketing the rest, leaving investors with little idea of how much they're paying and to whom. From April, the charges will have to be clear. That's forced fund supermarkets to work harder to compete. So will I pay less? All the platforms that have changed their charges claim significant numbers of customers will end up paying less. But the savings may be small, and certain investors will lose out, so check where you stand. If, for example, you are only investing in index-tracking funds, you might find your costs go up. Still, even small savings add up over time. On a pounds 10,000 portfolio consisting of five investment funds held for 10 years, the website Candid Money reckons an investor would end up with about pounds 32,000 on a cheap platform, compared with pounds 30,500 at a more costly rival. Compare fund supermarkets, using your portfolio, at comparefundplatforms.com or monevator.com . Which is cheapest? This depends on how much you have to invest, how often, and what you buy. For those with less than pounds 25,000, fund supermarkets such as Charles Stanley Direct and Cavendish Online often work out cheapest, analysts say. For larger amounts, Fidelity now looks competitive, particularly since it has abolished all administrative charges in favour of a single fee. Providers such as Interactive Investor and AJ Bell are also widely recommended. One complication is that certain fund supermarkets, including Interactive Investor and Alliance Trust , charge cash fees rather than a percentage - less competitive on smaller sums but good value for larger portfolios. Will I get cheaper charges straight away? Not necessarily - the new regulation only applies to new investments. Fund supermarkets are free to use the old charging model on your existing investments until April 2016 . However, it should be possible to move your funds to the new arrangements to save money, but follow instructions carefully - if you simply sell the funds and then buy them back you will incur charges and could face a tax problem such as lost Isa status or even a capital gains tax bill. What if I want ETFs or investment trusts? Exchange traded funds compete with conventional index trackers by aiming to replicate the performance of a market or sector, but are often cheaper. Investment trusts have, on average, tended to outperform unit trusts. Fund supermarkets operate separate charging structures for investors who want to buy these vehicles. The platform offering the best deal on funds may be the wrong option for investors who trade regularly in investment trusts or ETFs. What about index trackers? Don't assume you'll get rock-bottom fees. The charge levied may be cheap, but you'll usually still have to pay the fund supermarket's charges. On some platforms investors in passive funds may be paying far more than necessary by holding them this way instead of direct through the provider. Are charges the only consideration? Absolutely not. "The long-term obsession with charges needs breaking," warns Brian Dennehy of FundExpert.co.uk. "By far the most important factor dictating investor outcomes is fund choice." What he means is that you'll lose far more from choosing a dud fund than from missing out on the cheapest charges. To avoid that fate, you need a platform that offers a wide choice of funds - not all supermarkets offer all funds, particularly if you're a keen investment trust or ETF saver - and help with picking the best ones. Look for tools and research that you feel comfortable using. What if I want advice on my investments? You'll have to pay more. These platforms, while providing all sorts of useful tools to help you, won't give you advice on what is most appropriate for your circumstances, let alone tell you where to invest. Studies show fewer people are taking independent advice because of the way the rules on charges have been reformed. With advisers no longer allowed to earn commissions from investment firms, customers have to pay fees upfront. But avoiding such charges may be a false economy if you make a mess of the DIY route. The right tools to do the job Rossmina Urien, 39, has around pounds 10,000 invested in a range of funds through the rplan fund platform, at a charge of 0.35% a year. "I began investing more seriously during the recession because, when interest rates fell so low, it was impossible to earn something reasonable from bank savings," she says. Originally from Spain, Urien has lived in the UK for almost 15 years, and works as an art director at a post-production agency in central London . She describes herself as an inexperienced investor and believes it would be a mistake to choose a fund platform purely on the basis of price. "It's important that charges are competitive but I'm looking for value for money rather than just the lowest price," she says. "I'm not a financial expert but I do want to take control of my investments and make sure I really understand what I'm doing; so as well as looking for a platform that is transparent about charges, I also wanted lots of tools, including model portfolios to help make sensible decisions." She's in the medium-risk portfolio, which gives her exposure to funds including Fidelity Moneybuilder Income, Invesco Perpetual Corporate Bond, Threadneedle UK Equity Income and Artemis Global Growth. "This did very well last year," she says. "There's no point looking at the site every day. But fund platforms make it easier to look at your progress; if you're used to online banking, this will feel very natural."


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Source: Observer (UK)


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