Bringing Down the Cost of DIY Investing

A recent survey by investment research firm Platforum found that the cost of DIY investing has fallen for people with portfolios of all sizes over the past 12 months as firms slash charges in response to the emergence of low-cost digital wealth management platforms.

Those with up to £50,000 held on an online investment platform including general investment, ISA and Self Invested Personal Pension (SIPP) accounts will have seen their fees fall by around 1%; those with between £75,000 and £500,000 will have saved 1.6%.

However, there are some variations within these figures as someone with a pot of £75,000 saw charges fall by 4.1% from £351 to £337 a year, whilst those with a pot of £250,000 only saw a 0.3% reduction in charges.

Those with £500,000 invested saw charges rise by 1.1%, to an average charge of £1,227.

The Platforum report coincides with a call from the Financial Services Consumer Panel (FSCP)for greater transparency in the fees charged by automated advice (sometimes ‘robo-advice’) platforms, in which it shows how the new breed of platforms are co-existing with the DIY platforms.

‘the overall cost of DIY investing is being driven down’

According to the FSCP report, the average robo-advised customer is aged between 37 and 45, with an average pot of between £3,500 and £12,500; a more traditional DIY investor is between 54 and 57 with between £50,000 and £75,000.

It comes at a time when the Financial Conduct Authority (FCA) has re-opened applications to its robo-advice unit.

The FCA set up the unit following the recommendation of the Financial Advice Market Review (FAMR) in March to support the development of online advice propositions for the mass market.

Boundaries are being blurred as advisers adopt a hybrid approach of face to face and technology driven advice and an increasing number of wealth managers and execution only stockbrokers are also looking to stake a claim.

With ultra low index trackers available and professionally managed model portfolios available with extremely competitive fees, the overall cost of DIY investing is being driven down.

In conducting its research, Platforum created two basic scenarios based upon typical behaviours – a sub-£50,000 portfolio held within an ISA wrapper, invested solely in funds and trading four times a year, and a £75,000 pot, divided equally between an ISA and a SIPP, split between funds and individual stocks, making twelve trades a year.

Platforum reports that AJ Bell Youinvest, Charles Stanley Direct and Close Brothers were the cheapest platforms for small portfolios, while Halifax Share Dealing, Interactive Investor and Selftrade are the most competitive for wealthier investors.

Bristol’s DIY investing megastore, Hargreaves Lansdown, came out as one of the most expensive providers in both scenarios; it charges 0.45% on the first £250,000 invested and £11.95 per trade.

One of the conclusions of the FSCP report was that the FCA should ensure that charges are made clearer, and that automated advice platforms should offer a fee calculator with adjustable inputs to provide illustrative costs of investing in sterling, not just percentages.

In light of the findings of the Platforum report, it may not be long until the DIY platforms come under the same scrutiny as it identified investors being charged in a multitude of ways, making comparisons between providers difficult.

Firms charge either a flat fee or, more commonly, tiered fees that decrease the more you have invested; some firms charge differently for money held in ISAs and SIPPs and fees levied per trade also vary across firms.

The fees charged by the broker are in addition to the charges levied by the fund managers themselves; to ascertain the true cost of investing, all the different types of charges need to be taken into account and DIY Investor calls upon the FCA to insist upon far more transparent and simplified fee structures to allow customers to make objective comparisons between providers.

‘insist upon far more transparent and simplified fee structures to allow customers to make objective comparisons between providers’

There have been a number of significant changes to the investing landscape over time and technology is set to be the latest catalyst.

Online execution only stockbrokers have been in the UK for a decade and a half now and, along with fund supermarkets, they allowed a generation to take personal control of their finances.

The number of DIY investors was swelled following the government’s Retail Distribution Review (RDR) (In Praise of the Retail Distribution Review – DIY Investor Feb 2013) when a large number of advisers exited the business and many decided that they were unwilling to pay for previously ‘free’ advice.

Post-RDR, advisers were obliged to charge fees rather than take commission on the products they recommended, causing some to withdraw advice from less wealthy clients.

Now, a new breed of advisers are offering a hybrid between face-to-face and technology driven advice and increasing their earning power by also offering services such as protection and mortgages; a trend that may well permeate the online brokers.

In announcing the results of its survey, Platforum’s Jeremy Fawcett said: ‘The investing industry has been significantly disrupted by technology and changing regulations but it takes a little while for that to filter through to the end investor.

‘We’re now beginning to see more competitive charging and people saying they’re dealing with more of their investments on a DIY basis. The way we invest is changing and services are adapting in order to compete.’

Despite being found to be the most expensive, taking into account cost, brand strength, customer service and investment choice, Platforum ranked Hargreaves Lansdown as the best DIY investment firm with AJ Bell Youinvest second.