feature
Other Candid sites

Candid Financial Advice
Financial advice for a fraction of the usual cost.

Compare Fund Platforms
The UK's only fund platform comparison site for private investors.

Calculator over 80 Calculators!

Covering almost all your money needs - use them.

Mortgage Switch

Calculator Switching to a better mortgage rate could save you money. But, how much better off will you be, if at all, after paying any exit penalities and other fees? Find out here.

Random Jargon

'A' Day Pension Rules

6 April 2006, the day the government pension simplification rules came into effect.

| Printable version | A A A |


Author Photo

Updated ISA discount broker comparison

Investment | ISAs

By Justin Modray, published 14 March 2012.
Helpful? 69

Using a fund discount broker can save you money when buying an ISA. But did you know that some can save you a lot more than others? Find out all you need to know here.

Apologies for the extended absence, I've had a lot on my plate the last few months so the website has, unfortunately, had to take a back seat. I'm starting to free up some time again, so after getting the site back up to date I'll start answering the growing backlog of questions you've been sending in - if you're waiting, sorry for the delay, but it will get answered over coming weeks.

One of my first updates has been our Guide to ISA Discount Brokers, which compares the deals and services of 27 brokers. The comparison now uses a basket of 8 popular funds and incorporates any additional broker charges into an effective annual rebate figure - which should make it a lot more useful. Please take a look and let me know if you have any feedback or suggestions.

While all the brokers featured usually offer a saving versus buying direct from fund providers or via commission-based financial advisers, I'm surprised at the variation in discounts offered between the brokers themselves - it could run to thousands of pounds for some customers.

I also find it surprising that some discount brokers retain customers, as they appear to provide very little in return for taking full trail commission. They're probably benefitting from customers who can't be bothered to move elsewhere for a better deal - the same reason that props up a significant proportion of the financial services industry!

Anyway, this is probably an opportune time for a quick recap on how fund charges, commissions and discount brokers work.

Initial charges & commissions

Most unit trusts and oeics levy initial charges, typically between 3% - 5%. These come out of the money you invest, so put £10,000 into a fund with a 5% initial charge and your investment will only be worth £9,500 at the outset.

From this initial charge most fund providers pay a 3% sales commission to financial advisers and brokers.

It's actually a little more complex, as at any point in time unit trusts normally sell units at a higher price than they'll buy them back for - the difference is called a bid-offer spread. While the initial charge usually makes up the majority of the spread, any residual amount is effectively a further cost you absorb when selling units. If you want to read more on this take a look at the charges section on our unit trust page.

Annual charges & commissions

Unit trusts and oeics charge annual management fees. These can vary from less than 0.3% for tracker funds to 1.5% or more for actively managed funds.

The breakdown of a typical 1.5% annual management is as follows:

  • Fund manager revenue 0.75% (covers managing funds, marketing, running business & profit etc).
  • Sales commission 0.5% (paid to financial advisers/brokers).
  • Administration 0.25% (potentially paid to fund supermarkets/platforms).

Funds also incur other costs such as custodian and audit fees, which can add another 0.1% or more. These costs, along with the annual management charge, are reflected by a fund's total expense ratio (TER).

Note, a TER does not include ongoing dealing costs, i.e. the fees paid to stockbrokers (and any stamp duty) every time the manager moves from one share to another. Depending on the extent a manager changes their holdings, these costs could exceed a percent or more a year - a drag on fund performance.

The ongoing ('trail') commission is paid to the adviser/broker listed as 'agent' on the fund. This means that even if you've never heard from an adviser who sold you a fund years ago, they might still be pocketing the trail commission.

If you're getting nothing in return for the trail commission then it's straightforward to either appoint another financial adviser as the agent (to hopefully get some service) or reclaim the commission yourself via a discount broker.

How discount brokers work

Discount brokers simply stamp your fund application form with their 'agency' details (electronically when buying online), collect any sales commissions and pass onto you. In return for this service they'll usually charge a nominal fee or keep some commission.

Initial commissions are normally used to offset initial charges, meaning most funds can be purchased with no initial charge via almost all discount brokers.

Trail commission discounts vary between zero and all of it, depending on the broker you use. Any discounts are usually given as a cash rebate, either direct to your bank account or via a fund supermarket cash account. As the potential savings from trail commission discounts can exceed those from initial commissions over time, it's foolish to ignore them.

Some discount brokers also publish fund research and/or guidance material - ranging from genuinely useful to blatant marketing bumf.

To appoint a discount broker as agent on your existing investments you just need to sign a simple letter or form saying so.

Discount brokers & fund supermarkets

A discount broker might tie themselves to just one fund supermarket. Not a major problem if all the funds you want to buy are available, but potentially limiting - especially if you already own funds via a different fund supermarket.

If you plan to hold funds via more than one fund supermarket (or directly with fund groups) then you might want to check whether your chosen discount broker will provide you with 'consolidated' valuations (both paper and online), allowing you to see all your fund investments in one place.

Three discount brokers (Alliance Trust Savings, Bestinvest and Hargreaves Lansdown) run their own fund supermarkets. This should make little difference in practice, except that if you subsequently decide to move to another discount broker you can't simply transfer the 'agency' - you'll instead need to physically move ('re-register') your funds which is both tedious and potentially expensive. It also means the broker picks up the 0.25% or so platform fee paid by fund managers, although only Alliance Trust seems to use this to enhance some trail commission rebates.

What if I just want to buy shares in an ISA?

If you only wish to hold shares (or gilts/corporate bonds) within your ISA then a low cost online stockbroker will likely be the cheapest route. For example, x-o.co.uk charges just £5.95 per trade with no charge for an ISA wrapper - read our review here.

Which discount broker is best?

It really depends on what type of service you want. Cavendish Online remains the cheapest for most investors, but expect a 'no-frills' service. If you have a larger portfolio and/or want to hold shares alongside funds then Alliance Trust Savings also looks very good value. Hargreaves Lansdown provides lots of information/research, but looks increasingly uncompetitive with stingy rebates and fees for non commission paying funds such as trackers. I can't vouch for the service of any of these brokers, but a look in our user reviews section shows generally favourable feedback.

I suggest taking at look at the comparison tables in our Guide to ISA Discount Brokers then work out which is most likely to be best value for your needs.

And if you're not comfortable choosing funds yourself then consider using an independent financial adviser. Yes, it'll cost more, but it may prove money well spent if you're lucky enough to find a good one.

More information

More about Unit trusts and charges.

Guide to ISA discount brokers.

Guide to trail commission rebates.

Guide to fund supermarkets.

If you found this article helpful, please add your vote by clicking here.


Readers' Comments (11) - To post a comment please register or login .


Comment by hdeakin299 at 4:06pm on 17 Mar 2012:

I am still trying to figure out how Cavendish Online make their money. The section on Trail Commission Rebate indicates that FundsNetwork pays Cavendish 0.05% a year from their fees . Is that a separate amount from the amount that is rebated by Cavendish via Fidelity's Remittance Advice (Adviser Ongoing Fee). Or do they just run on the initial £25 multiplied by thousands (still not enough to run a business??) .Sorry to query it but I have never heard of a business that runs so "thin air"ishly. I still feel have not "got" the whole story.

Also , a lot of the examples of savings of costs and charges like the one in the Sunday Times recently , appear to relate only to active rather than passive funds. I can see why this is the case as the savings are obviously a lot bigger with active funds : journalists generally would prefer to show and document large dramatic savings rather than just modest ones. But as passive funds are becoming more important there appears to be a gap in the information available.


Comment by rafferty at 7:54pm on 17 Mar 2012:

HD,
Normally the typical annual management charge for a fund of 1.5% includes a 'platform fee' of 0.25% plus 'trail commission' of 0.5%. The platform fee would go to Fidelity Fundsnetwork and the trail commission normally goes to the IFA. The platform will also get a small fee just for listing a fund and there may be other marketing payments which tend to be rather secretive if a platform actively promotes a fund (hence the unexpected enthusiasm some companies have for certain funds) .

CavendishOnline rebate the whole of the initial and trail commission normally paid to advisers and instead get a very small slice, 0.05%, from Fidelity's platform fee. Cavendish no longer charge any account fee and Fidelity no longer charge a fund switching fee. So for a fund with an AMC of 1.5%pa the net cost would be 1.0%pa instead.

Cavendish seem able to do it by offering a very efficient no-frills service with large volumes and Fidelity are presumably willing to give them the 0.05% extra discount because they are getting a huge amount of business from them. Although Cavendish are the intermediary, no payment is made to them but directly to Fidelity who place it with the fund managers subject to the usual safeguards.

You mention passive funds which often pay little or no commission. These, such as the HSBC range, are available via Cavendish without any additional charges unlike those imposed by Hargreaves Lansdown since the beginning of 2012.


Comment by hdeakin299 at 11:31am on 18 Mar 2012:

Thanks Rafferty : very informative

HD


Comment by suffolk at 3:27pm on 19 Mar 2012:

Welcome back! I love this site and all the work you've put into it!


Comment by justin at 9:42am on 09 Jul 2012:

Comparison now updated to reflect new Interactive Investor charging and pending Alliance Trust ISA fee hike.


Comment by ivanopinion at 2:41pm on 12 Jul 2012:

Do your calculations for Interactive Investor take into account the two free trades per quarter? Making two trades per quarter at ATS would cost £100 a year, which would tip the balance significantly in favour of Interactive Investor.

Another factor which I don't think will be reflected in your figures is that ATS only charges one administration fee per family, no matter how many accounts they have. I realise that you can't go through all the permutations, and the scenario you are looking at is just a single ISA account. However, Interactive Investor are unusual in that their administration fee is charged only once per family, no matter how many accounts they have. So, if a husband and wife both have ISA accounts with Interactive Investor, the effective admin fee is £40 per year per account. If they also have a dealing account each, the effective admin fee is £20 per year per account.

Perhaps it would be fair to add a note about these two factors, which for many investors could mean that Interactive Investor is significantly cheaper than ATS.

In relation to the rebates, something I have noticed is that although they both claim to rebate all platform and trail commission, the amount of rebates that they give is often different for any particular fund. My guess would be that on about a third funds, ATS gives a bigger rebate; on another third, Interactive Investor gives a bigger rebate; and on the remainder the rebate is the same. Therefore, it really depends which specific funds you hold. In some cases, you might be better off having separate accounts with both ATS and Interactive investor, so that you can maximise the rebates, even though this might mean incurring admin fees at both companies.

Edit: one more thing, the fee to transfer an ISA out of ATS is £50 plus VAT = £60. On top of that, you pay an additional £20 for each investment that you want to transfer out within the ISA (£15 until the end of this month).


Comment by justin at 9:46am on 13 Jul 2012:

Ivanopinion, many thanks for the valuable points you've raised.

I updated the ISA discount broker guide last week to reflect Interactive Investor's new offer, but didn't update this older article hence no mention on this page.

Interactive Investor's two free trades are included in my figs in so far as the initial investment, but as my figs don't include subsequent trades this obviously gets omitted in the bigger picture.

I had omitted ongoing trades for fear of making the comparison too unwieldy, but perhaps it's got to the point where it's necessary to ensure a fair comparison betwen the various brokers/platforms. I'll look at updating the figs over the next week and will also add notes as per your sensible suggestions.

Thanks again, Justin.


Comment by ivanopinion at 10:52am on 13 Jul 2012:

Thanks Justin. I do have a lot of sympathy about not over complicating. However, your comparison does have some influence and many users will simply assume that the result of your scenario will be the same for them. In fact, any of the top three might be the best for some investors, and in some cases a combination of the top three would be the best. It is even possible to conceive of portfolios where it would be better to hold them in one of the others, such as Hargreaves Lansdowne.

I don't think it is feasible for you to keep constructing different scenarios, but perhaps it would make sense to add one more scenario which assumes more ongoing dealing. I would think it is pretty rare for investors to make some acquisitions and then simply hold them for 10 years, without switching them or adding to them. Most ISA investors add to their account each year.

Perhaps it will also be worth adding a comment in relation to Cavendish Funds Network that they have not yet introduced any changes in reaction to the forthcoming removal of trail commission and, a year later, platform commission. Anyone moving to Cavendish at the moment should realise that their charges will definitely change. I believe they have already announced what their charges will be. In contrast, ATS and Interactive Investor have both recently changed their fees, so there is at least a good chance that your current calculations will remain good at least until the end of the year. They both already rebate all commission, so there is no obvious reason why they would need to change their charges (although this did not stop ATS making its recent change). At that point, most funds will presumably have switched to new classes of funds with no trail commission built into the AMC and, in many cases, no platform commission either. This might significantly level the playing field, because rebates will no longer be a differentiator (as there will be nothing to rebate). You will simply need to compare charges.


Comment by ivanopinion at 5:36pm on 13 Jul 2012:

I ran out of characters. Perhaps, if you are willing to run another scenario, it should be where the investor invests the ISA limit each year for 10 years, each year spreading it equally between the eight funds that you have chosen. If this investor was with Interactive Investor, he or she would sensibly purchase two funds each quarter, in order to use the free trades.


Comment by ivanopinion at 9:46am on 07 Oct 2012:

I have now found out that Interactive Investor uses the Cofunds platform. I had not previously realised this, because the underlying Cofunds “body" seems to be hidden by a tailored Interactive Investor skin. I have now found the following page which confirms that they are using Cofunds: http://www.iii.co.uk/funds-rebate-explained

It says that the rebate is:
100% of the trail commission we’re allocated from your fund’s AMC
100% of our share of the fund platform fee we’re allocated from your fund’s AMC

This is the first time I have seen any mention that they are only rebating their “share" of the platform fee. The rebate of 0.64% now makes sense, because presumably what is happening is that in cases where the platform commission paid by the fund to Cofunds is the standard 0.25%, Cofunds is keeping 0.11% and is passing 0.14% to Interactive Investor. They then rebate this 0.14% to the investor, together with the 0.5% trail commission, making 0.64% total rebate.

I think it therefore follows that there will definitely be some further fee changes at Interactive Investor, once platform commission is no longer allowed. Cofunds has I think already announced that it is switching to making a platform charge to the investor. Presumably it will insist on doing this with Interactive Investor, although perhaps it will be willing to give a discount, so that its fee is similar to the current 0.11%.

I wonder if there is a similar explanation for why ATS only rebates 0.5% on many funds, even though it claims to rebate all trail and platform commission? That is, perhaps their platform is also just a rebranded version of another platform, which keeps some of the platform commission? Therefore, ATS are only rebating the commission that they receive, as opposed to the total commission paid by the fund?


Comment by justin at 10:41am on 12 Nov 2012:

I've been in touch with Alliance Trust Savings (ATS) who confirmed that they receive no payments (other than those rebated to customers) from the fund providers on their platform. Where the ATS rebate is less than you'd expect it's because they haven't negotiated a rebate equivalent to the platform fee charged by others (c0.25%) on top of trail commission (usually 0.5%).

I agree, seems strange - but seems due to ATS not negotiating better deals in some instances rather than any underhand dealings.