Falling trading costs attract increasing DIY investors
According to discount broker Clubfinance, as the broker market becomes more competitive, it is becoming cheaper for investors to buy and sell shares as often as a professional investor running an actively managed fund but for hundreds of pounds less than the cost of buying a similar fund.
David Scrivens, director of Clubfinance, said: “Historically, the cost of doing this has been relatively high, perhaps putting investors off or preventing them from buying and selling as often as they would like.
“But this is no longer the case. Trading your own portfolio of shares can dramatically cut costs compared to investing through a mutual fund, which is something many investors probably do not realise.”
Savings figures vary depending on the size of portfolios and how often an investor trades, but even with smaller investment pots the money saved in fees and charges could be significant.
Using Clubfinance’s Frequent Trader 50p share dealing service, an investor with a £50,000 portfolio of 50 UK shares who traded 60 times a year could save more than £500 compared to investing in the average actively-managed UK mutual fund*.
The total cost using Frequent Trader to buy 50 shares and then make 60 share deals in a year would be £55, with an annual platform fee of 0.35% – in this example amounting to £175 – taking the total cost (excluding stamp duty) to £230.
However, for a fund with an annual management charge (AMC) of 1.5%, this fee alone equates to £750 on a £50,000 investment. But AMCs do not typically include share trading costs, which are usually deducted at portfolio level. In this example fund trading costs would be around 0.6% (excluding stamp duty)**, adding another £300 to give a total of £1,050 compared to Frequent Trader’s £230.
Even with a discounted AMC of 1% the fund costs would be £800, giving over £500 difference compared to running your own share portfolio. A fund’s total costs, often expressed in the form of a Total Expense Ratio (TER), normally include further expenses, potentially creating even higher charges.
Clubfinance highlights that by investing in a fund an investor is paying for the skill and expertise of the fund manager and funds remain one of the best ways to access overseas markets. But for confident investors, it is becoming much more cost-effective to regularly trade UK-listed shares.
Scrivens added: “Share trading is not for everyone. For many people, professionally-managed funds are one of the best ways of accessing the stock market and, even then, they should still seek appropriate investment or financial advice.
“But for some investors mutual funds might be the first step on the ladder of investing. As they grow more confident and knowledgeable, they may consider investing in a portfolio of shares to complement their fund holdings.”
This comes as new legislation, the Retail Distribution Review (RDR), requires financial advisors to charge their clients fees up front for advice given, and effectively banning the previous comission based model.