BLOG: New platform rules have left investors more confused than ever
As the market adapts, it appears to have made matters more confusing.
The new regulation signalled an end to fund platforms or supermarkets receiving commission from fund providers. This has resulted in platforms and supermarkets announcing a raft of new charging structures.
The end result: comparing and choosing a platform is at best no easier for the consumer, and at worst significantly harder.
Investors need to understand what is right for them
Two distinct models have emerged.
1) A percentage fee based on investment values
Annual charges typically range from c.0.25% to 0.45% and replace the revenue earned by the platform or broker through commission from fund providers. In some cases there is no charge for dealing, however other brokers charge dealing commission separately.
2) A flat fixed fee
A small handful of providers charge a flat fixed fee for an account regardless of the value or investment type held. A dealing fee is typically charged separately.
For a low value account with high dealing frequency, a value related charging structure including dealing costs is likely to be best. However, as an account builds in value and if dealing frequency is more moderate, which it typically is in funds, a fixed fee structure is likely to be more economic.
Value related charges may appeal when starting out, however once a second or third year’s ISA contribution is added, percentage charges start to translate into hefty costs when compared to the fixed fee alternatives.
For example, when the ISA limits are increased in July, if you invest £15,000 in funds and pay 0.3% in fees you will pay £45. However, even assuming no investment growth or income, if £15,000 is contributed in the next tax year so the account is worth £30,000, the fees will double to £90 for the same service. Low rate fixed fees start to look increasingly attractive as the account value builds.
The future of platform charges
Increased complexity will start to diminish and charges will become clearer, simpler and lower for investors.
In the short term personal investors should make sure they fully understand the charging structure of their provider, ensuring it offers the best value given the size and nature of their investments and the frequency of their trading.
Personal investors should consider whether the charges will reward or hinder their longer term aspirations, and should also consider the quality of the service they receive.
Investing should be a long term enterprise and so ensuring a provider has the services, service levels and charging structures which support the investor’s attempts to achieve their investment objectives over that time horizon is critical.
Richard Stone is chief executive of The Share Centre