You’ve decided to go it alone and make your own investment decisions. You’ve worked out how much you can afford to risk. There’s one thing left to do: choose a trading platform. With at least 20 vying for your custom, it can be tricky to whittle them down. So here’s an overview of which might suit your needs, and how much they will charge.
Let’s start with the basics. What are platforms? Steven Nelson of research group the Lang Cat sums them up nicely. Platforms ‘do four basic things for you. They help you buy stuff you want to invest in; hold it while you still want to invest in it; report on it so you know how it’s doing; and sell it when you’ve had enough of it.’
Historically, there have been two types of platform, one focusing on funds and the other on shares. Financial advisers used them to arrange clients’ investments, earning themselves nice commissions from the platforms in the process. Today, thanks to regulatory changes that put paid to that type of commission and forced advisers to charge upfront fees instead, most platforms reach out directly to investors. They have realised that savvy clients would rather handle some investments themselves, rather than pay advisers a penny more than necessary.
To attract these investors, platforms have made it easier for individuals to get in on the act. Most now enable users to invest in both funds and shares through popular ‘wrappers’, such as Isas, Sipps and dealing accounts. But not all cover all three. Some — including AXA Self Investor, Cavendish Online, Chelsea Financial Services, rplan and Willis Owen — don’t offer Sipps. Others, such as Chelsea Financial Services and Retiready from Aegon, don’t have share-dealing accounts. So when looking for a platform (or indeed a ‘fund supermarket’), first find out whether it actually offers access to the products you’re interested in.
Your next consideration should be the level of support on offer. Some platforms are aimed at first-time DIY investors, so their sites are packed full of useful tools such as calculators, fact sheets and risk and investment filters. They usually have good help desks too — online, over the phone or both — and some are even open on Saturdays.
One useful tool for novices, offered by many platforms, is a model portfolio, ‘a pre-loaded portfolio designed to save you the trouble of choosing’, explains Nelson. Fidelity Personal Investing has a range of such portfolios, including the PathFinder range — which it describes as a list of ‘well diversified, mixed-asset options that savers can choose from, based on their attitude to risk’.
Some platforms list ‘best buy’ funds, which usually offer investors a discount on fees. For example, Hargreaves Lansdown’s Wealth 150 comprises funds for which it has negotiated lower prices. According to the Lang Cat, there are 90 funds on the list with an average annual management charge (AMC) of 0.65 per cent, and a further 27 funds in the super-discounted Wealth 150+ that have AMCs averaging 0.54 per cent. ‘Normally you’d expect to stump up around 0.75 per cent to access these funds,’ says Nelson.
However, he also warns investors not to assume such lists comprise a selection of the best-performing funds available. Some top funds may be excluded if they refuse to offer the platforms a discount. For this reason, the Lang Cat refers to best buy lists as ‘best-friend deals’, though ‘platforms really don’t like it when we call them that’. So before you stuff your basket full of ‘best buys’, check the small print as to what qualifies them for inclusion.
Other platforms help first-timers get started with dummy accounts. The Share Centre’s Practice Account gives users £15,000 of ‘fantasy money’ to invest wherever they want ‘without risking a penny’.
Of course, fees are an important consideration too. ‘A lot of platforms have endless hidden charges including set-up charges and exit penalties,’ warns Nick Hungerford of Nutmeg (which offers a range of fully managed investment portfolios that clients can invest in rather than being a conventional trading platform).
While there’s a long list of potential charges investors need to watch for, the most common are the platform fee and fund trading and/or share-dealing fees. The platform fee is an annual charge that may be expressed as a percentage of the fund held or a fixed amount. ‘Whether a percentage or fixed fee is more cost-effective depends on how much you are investing and how often you intend to trade investments,’ explains Justin Modray, founder of the financial guidance website Candid Money.
‘In very general terms, fixed-fee platforms such as Alliance Trust Savings and Interactive Investor tend to be more competitive above around £50,000 for Isas and around £100,000 for Sipps, versus lower-cost percentage-fee platforms such as Cavendish Online, Charles Stanley Direct and Fidelity.’
Analysis from the Lang Cat backs him up. Interactive Investor’s fee structure — an £80 investor fee with two free trades per quarter, which equates to £120 a year based on 12 fund switches — makes it prohibitively expensive for stocks-and-shares Isa investors with smaller portfolios. Other platforms charging percentage-based fees, such as Barclays Stockbrokers, would cost an investor with a £10,000 portfolio just £35 a year, or £70 for a £20,000 portfolio. But for Isa portfolios of £50,000 and above, Interactive’s £120 fixed charge makes it one of the cheapest platforms: for a portfolio of £100,000, its £120 charge compares to £750 from Nutmeg and £450 from Hargreaves Lansdown.
As for dealing fees, percentage-fee platforms seldom charge for buying, selling or switching funds, whereas fixed-fee platforms typically charge around £10 per trade. As Modray explains, ‘Fund trading fees are probably not an issue if you only trade a few times a year, but could become prohibitive if, for example, you make several fund trades each month. For £100,000-plus portfolios, trading a couple of times a week, iWeb, Clubfinance, SVS Securities and x-o.co.uk are likely to come out cheapest.’
Keen to have the last word, Steven Nelson from the Lang Cat says: ‘Pricing is only one part of the deal. What the platform does for you, how you feel about using it, is the other part. The two together make what we call “value”. But — this is important — we can’t tell you what you value. Your circumstances are exactly that, yours.’
A trading mechanism that magnifies risks and rewards
If you’re looking for something racier than funds or shares, the world of spread betting can seem exciting — and again there’s a choice of readily available platforms. Spread betting allows you to bet on market rises or falls without the need to buy the underlying asset.
And because you’re not trading directly, gains are tax-free. However, unlike funds or shares, spread betting is a leveraged product: a small deposit gives you a much larger market exposure, magnifying potential risks and rewards.
The experience of one group of spread betters offers a parable of the dangers involved. Investing through IG, they had exposure to the Swiss franc in January when the Swiss National Bank removed the peg against the euro. Investments of 20–30,000 Swiss francs swiftly became losses ten times larger.
The investors don’t dispute that the nature of these bets put their capital at significant risk, but they believe IG didn’t give ‘best execution’ to exit their positions after stop-losses were triggered — which it’s legally obliged to do.
In other words, they believe it took IG too long to settle their accounts, meaning their positions were not finally closed until the market had dropped well below the level at which they thought the stop-loss would kick in. One investor told Spectator Money: ‘Quite a few members of my group are now facing bankruptcy and losing their homes.’
An IG Index spokesperson replied: ‘At IG we source our foreign exchange prices from a large number of global banks to ensure we give our clients the best prices and execution possible. Following the sudden announcement by the Swiss National Bank on 15 January 2015, there was an unprecedented period of illiquidity in the Swiss franc, when all the various global bank liquidity providers stopped offering prices. As soon as IG was able to source sufficient trading liquidity, we closed out all relevant client trades and chose not to retrospectively requote any prices, despite this resulting in a negative financial impact for the company. IG has been working closely with clients that have been negatively impacted by the Swiss franc appreciation, and we have had no discussions with any client which would result in bankruptcy or losing their homes. We’ve made it clear that clients who are in difficulty should contact us, as our priority is ultimately in working with our clients to find a solution.’
The moral of the story? Spread betting is a sophisticated and risky form of investment, only to be considered by experienced investors.
Laura Whitcombe is deputy editor of Moneywise and co-author of Money Manual 2015.
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