From next year, financial advisers will have to charge investors upfront for their advice, rather than making the money through commission.
One result is that many investors will take matters into their own hands and take control of their own finances. And one of the best ways to do that is to open a self-select individual savings account (Isa) with a broker.
We’ve written a lot more about the advantages of Isas in our MoneyWeek Basics series (you can sign up for it here). But in short, an Isa is simply a wrapper that protects your investments from tax. What you put in it is up to you.
But with so many options to choose from, what’s the best self-select Isa for you? We’ve had a look at the popular accounts to see which you should be using to invest your money.
What type of investor are you?
When comparing accounts, we’ve assumed that you are a certain type of investor. We think that excessive trading usually costs investors more than it makes them. So we’re not worrying too much about special deals for frequent traders.
So with little to choose between brokers for buying and selling shares, we’ve put more emphasis on other costs and features. The results are shown in the table below.
| Broker | Trading fee | Isa charge | Regular investing | Dividend reinvest- ment |
Transfer charges | Inter- national shares |
|---|---|---|---|---|---|---|
| TD Direct Investing | £12.50 | Free | £1.50 | £1.50 | £50 + Vat | Yes |
| Hargreaves Lansdown | £11.95 | 0.5%, capped at £45 | £11.95 | 1%, min £10, max £50 | £75 + Vat | Yes |
| Self Trade | £12.50 | Inactivity fee £8.75 + Vat per quarter | £1.50 | £1.50 | £15 per stock | Yes |
| Halifax | £11.95 | 0.05% per month, min £2.16 per month, max £8.33 per month | £2 | 2%, max £11.95 | £50 + Vat | Yes |
| iii.co.uk | £10 | £80 | £1.50 | 1%, capped at £10 | £15 per stock | No |
| The Share Centre | 1%, min £7.50 | £60 | 0.50% | 0.50% | £20 + £15 per stock | No |
| Barclays | £12.95 | £60 | N/a | 1%, max £7.50 | £50 + Vat | Yes |
| iWeb | £10 | Free | £2 | 2%, max £10 | £50 + Vat | Yes |
| Alliance Trust | £12.50 | £48 | £5 | 5 | £50 + Vat | Yes |
| Sippdeal | £9.95 | Free | £1.50 | N/A | Nil | Yes |
Annual management charges
So what does it all mean? Well, we’ll deal with the costs of owning unit trusts later.
For self-select Isas we want somebody else to look after our shares, and collect our dividends, for as little money as possible. The lower the cost, the better.
On that score, TD Direct Investing doesn’t make any charge as long as your fund is worth over £5,100. iWeb and Sippdeal are also free, and have no limit. Halifax share dealing on the other hand – which coincidentally owns iWeb – will charge up to £100 a year (£8.33 a month).
Can you invest regularly if you want to?
Not everyone has the luxury of being able to invest big lump sums. Some people also think that regular investing is a good way to smooth out the ups and downs of the investment markets. This is how most people invest when they pay into a company pension scheme for example.
So the ability to invest modest amounts regularly – say every month – is a useful feature of stock broking accounts. Most brokers offer investors a cheap way to do this, with many offering fees as little as £1.50 per share bought (although this can add up if you have lots of shares).
Hargreaves Lansdown is cheap if you are buying a unit trust from its recommended list of funds. But be careful if buying individual shares on a monthly basis. In this case, you would end up paying £11.95 per trade, which could end up being very expensive. The Share Centre’s charge of 0.5% of the trade’s value could also end up being expensive if you are investing large amounts.
Dividend reinvestment
We are also big fans of dividend reinvestment. Given enough time, the wonders of compound interest on reinvested dividends can allow you to build up a decent savings pot.
The good news is that most brokers now offer this service. However, it’s worth checking which investments you can reinvest dividends with. Often it’s restricted to shares in the FTSE 350. Also, some companies – Hargeaves Lansdown is one – won’t reinvest dividends until they reach a certain level (in this case £200). Others will re-invest as long as you have at least enough to buy one share.
TD Direct Investing, Selftrade and iii.co.uk offer the cheapest reinvestment costs. Unfortunately, Sippdeal does not offer this service. This is the only slight criticism of its otherwise excellent Isa account.
Exit charges
Most brokers won’t charge you anything when you sign up – they want to make money from you after all. But if you decide you don’t want to use them anymore you’ll have to pay up. Only Sippdeal of the major brokers doesn’t charge you for leaving them.
For some it’s a flat fee, but others will charge you on the basis of an amount per stock. If you have a portfolio with lots of investments this could add up to a lot of money.
What else do they offer?
Gone are the days when UK-listed shares were the only thing you could invest in. Today’s DIY investors are increasingly sophisticated and need a broker who will allow them to invest in lots of different assets.
This means you are looking at the ability to buy foreign shares, corporate and government bonds, exchange traded funds (ETF’s), and preference shares, for example – and preferably all over the internet.
Selftrade has an impressive set of online options in this respect. Other brokers offer similar ranges, but for more exotic options, you might have to buy over the telephone which usually costs more.
When buying foreign shares, also look out for things such as exchange rate charges. These can catch you out and increase costs if you are not careful.
What about if you own funds?
A lot of the same administrative charges will apply to funds held in Isas, but there’s more scope for confusion here.
That’s because of the commissions that discount brokers have received from fund managers over the years. These are know as trail commissions and have been paid to financial advisers when their customers invest in a fund.
This has also allowed discount brokers to pocket the commission without giving advice. This is why they have been able to tell investors that buying funds through them is free, when in fact it isn’t.
The money comes from the annual management fee (typically 1.5%) that most fund investors pay. The discount broker usually pockets 0.5% annual trail commission and about 0.25% as a platform charge. These platform charges are sometimes rebated back to the customer.
From January next year, trail commission to advisers on new fund purchases won’t be allowed. But brokers will still be able to receive them, although a ban is likely in due course. Brokers will increasingly have to be upfront with people who buy funds through them.
TD Direct Investing has said it will rebate all trail commission back to investors. But it will charge a fee of 0.35% where the trail commission is more than 0.5%.
Hargreaves Lansdown won’t charge any fee on around 2,400 funds. But some funds such as index trackers will have a charge of £1 or £2 per month. This means holding a portfolio of ‘low cost’ index funds could actually cost quite a lot.
Not all brokers have come out and said what the costs for holding funds will be after January. This makes comparisons difficult. But one thing that seems clear to us is that fund platforms in general will have to replace the lucrative commissions they used to receive. This suggests that the upfront cost of DIY investing will probably go up, whoever you use.