Most fund managers struggle to beat the market consistently. Some never do. A recent report by financial advisers Bestinvest looked for equity investment funds that had underperformed their benchmark index by more than 10% over the last three years. It found 108. In total the funds, run by household names such as Scottish Widows and M&G, looked after (if it can be called that) £9bn of your money and racked up £133m a year in fees along the way.
No one claims investing is easy. But when major fund managers are charging so much for so little, you might be better off choosing your own investments. Enter the self-select Isa wrapper. How do you set one up?
The first thing to do is pick the right broker. A self-select Isa means more paperwork, so providers will charge for it. Expect an annual management fee, which is either a fixed amount – between £20 to £50 – or a percentage of the total investment. What works best for you depends on how much you plan to put in. Brokers also levy a dealing fee very time you buy or sell. These can be anything from £1.50 upwards. If you’re not going to trade often, this fee will not matter as much. But if you think you will be making frequent changes to your portfolio, then an active trader account – which will charge lower fees per trade, as long as you make a certin number – may be for you.
Another thing you’ll need to keep an eye on are dividend reinvestment fees. At MoneyWeek we’re big fans of dividends as research demonstrates that they make a huge contribution to your eventual return. With an Isa you can reinvest your dividends, even if it takes you over the allowance. But some brokers charge a small fee for this.
You’ll also need to think about what type of broker you’re after. Execution-only brokers have the lowest fees and just provide you with the internet trading platform you’ll need to trade. If you pay a bit more you can get a ‘full service’ or ‘advisory’ broker that will help you chose which shares to pick. Given that part of the point of a self-service Isa is to avoid paying too many fees to so-called experts, we’d generally steer clear.
Now for the really tricky bit: choosing what to put in your Isa. There are restrictions. Foreign shares, for example, are allowed, but only if they are listed on an HMRC ‘recognised stock exchange’. And as you can’t trade foreign currencies directly through an Isa you will have to convert to and from sterling as you go. This can get expensive.
Some bonds, exchange-traded funds (ETFs) and investment trusts are also Isa-eligible, but watch out – bonds, for example, must have more than five years left before maturity when you buy them. Perhaps more frustratingly, shares and investment trusts listed solely on the London Aim market for smaller companies are not eligible as they are judged to be too illiquid and risky. The logic is that the government created the Isa tax breaks to encourage people to save, not punt on small-caps stocks. Quite how they explain why EU government bonds are still eligible in the wake of recent events in Europe is another matter.
Fifteen of the best self-select Isas
| Provider | Telephone | Dealing charge | Annual fees/other conditions |
|---|---|---|---|
| AJ Bell Youinvest | 0845 54 32 600 | From £4.95 per online deal | No account charge. 0.2% custody charge for holding funds (OEICs and Unit trusts). |
| Hargreaves Lansdown | 0117 900 9000 | £5.95 / £11.95 | 0.5% per year (capped at £45) |
| Alliance Trust Savings | 0800 032 6323 | £12.50 | £25.50 + VAT |
| Natwest Stockbrokers | 0808 208 4400 | £15 | £25 + VAT for portfolios less that £10,000 |
| Charles Stanley | 020 7149 6437 | £10 (phone) | £28.75 set up + £30 annual fee |
| Hoodless Brennan | 020 7382 8300 | £20 (phone) | First year free, then £50 annual fee |
| TD Waterhouse | 0845 607 6002 | £8.95 | Starts from £30 + VAT |
| Barclays Stockbrokers | 0845 601 7788 | £6.95 | Starts from £30 + VAT |
| Selftrade | 0845 0700720 | £12.50 | £35 |
| Fidelity | 0808 252 8375 | £9 | £5.10 per month |
| Walkers, Crips Sbs | 0203 100 8000 | 1.65% for first £10,000, 0.5% thereafter | £15 per stock (min £25) |
| Share Centre | 01296 414141 | 1% (Min £7.50) | £12.50 per quarter + VAT |
| Jarvis Invest Mgmt | 01892 700800 | £9.50 | £50 + VAT |
| F&C | 020 7628 8000 | 0.20% | £60 + VAT |
| Saga Share Direct | 0845 900 3002 | £11.50 | N/A |
| Halifax Share Dealing Ltd | 0845 600 0169 | £11.95 | 0.05% per month + VAT (min. £2.16; max. £8.33) |