Fund supermarkets: how much can you save?

Fund supermarkets

Fund supermarkets: how much can you save?

By Michael Trudeau

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When investing your money, the charges you pay are one of the few things you can control with any certainty.

So it makes sense to consider all expenses very carefully, and reduce costs wherever possible in line with your chosen investment strategy.

Fund supermarkets: how much will you pay?

Choosing a low-cost broker is not as straightforward as you might assume. 

Because some brokers charge a percentage-based fee, while others charge fixed fees in pounds and pence, the size of your portfolio will make all the difference when appraising your options.

Small portfolios

A portfolio with a value of £10,000 could cost you as little as £110 if your fund supermarket charges 0.25% a year, plus an assumed ongoing fund charge of 0.85%. 

By contrast, the same portfolio, held with a fixed-fee broker charging a flat £80 for your account (plus the assumed 0.85% charge), would mean your overall cost would shoot up to £165 a year.

Medium and larger portfolios

This charging scale is turned on its head when you consider a larger portfolio. 

An account valued at £100,000 would set you back £1,100 using a broker that charged 0.25% (again, assuming fund charges of 0.85%), whereas the fixed-fee broker charging £80 would reduce your overall charge to £930.

What you'll pay in fees is greatly affected by the size of your portfolio, its contents, how often you trade, and whether you rely on regular contributions or lump-sum investing.

For example, you may think it's more affordable to put away a small amount each month instead of saving up a larger lump sum to invest. In general, an investment that has more time in the market is a good thing, but in many cases the fees you'll pay as a result will outweigh any financial benefit of being invested for longer.

Fund supermarkets: using our tables

In our pricing heat maps we use a colour-coded scale, with the cheapest showing as green and the most expensive as red, shifting towards yellow at the mid-point.

We've looked at three types of portfolio, with each then costed for 10 pot sizes - from the small but growing (£100 invested each month) to the large (lump sum of half a million).

The first portfolio type assumes you've invested entirely in open-ended funds, such as unit trusts, and rarely trade - making one buy and one sell each year. The second portfolio assumes a split between funds and shares in individual companies, with six trades completed a year. The third assumes a portfolio made entirely of shares, and traded 12 times a year - six buys and six sells.

Fund supermarkets will often, but not always, charge for trading, and prices will often differ whether you're buying funds or shares. For example, Barclays might be relatively cheap if you hold £10,000 in funds and hardly trade at all. But if you hold shares and trade more often (portfolio type 3), it becomes quite a bit pricier.

Think about which portfolio type most closely matches your investments and behaviour, then look up your portfolio size on the appropriate table to see how different brokers compare.

Companies that charge a percentage of your assets might be the best choice for people with smaller portfolios, while those that charge a pounds-and-pence fee could be better for those with larger amounts invested.

You also have to keep an eye on changes in price - Fidelity and Selftrade both recently changed the way they charge, making themselves significantly more expensive for many people. Fidelity, for example, now charges a flat £45 fee for any pot smaller than £7,500 - making it almost prohibitively expensive for those people.

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Portfolio type 1: funds only

For people who hold only open-ended funds in their portfolio, and rarely trade. Individual cells show the annual cost of using each broker for 10 different pot sizes - from £100 invested each month, to lump sums ranging from £1,000 to £500,000.

Notes: In all scenarios, costs rounded to nearest pound. Figures indicate fund supermarket charges only; fund charges, advice charges etc will be in addition to this. For portfolios up to and including £30,000 we assume the entire portfolio is held within an Isa wrapper. For larger portfolios we assume an even split between an Isa wrapper and a general investment account. In this portfolio type, trading means one buy and one sell per year.

Source: The Lang Cat, based on bespoke Which? Money criteria.

 

Portfolio type 2: funds and shares

For people who hold some funds but also some shares, and trade occasionally, ie six times a year.

Notes: Trading means three buys and three sells per year. Fidelity is excluded because it doesn't offer shares.

Source: The Lang Cat, based on bespoke Which? Money criteria.

 

Portfolio type 3: shares only

For investors who only hold shares in individual companies and trade more frequently, ie 12 times a year.

Notes: Trading means six buys and six sells per year. Fidelity is excluded because it doesn't offer shares.

Source: The Lang Cat, based on bespoke Which? Money criteria.

Fund supermarkets: new ways of charging

It used to be that fund supermarkets made their money from commission paid by fund managers. 

Out of a typical ongoing fund charge of 1.5% a year, the supermarkets would keep around a third. But new rules introduced in April 2014 mean that:

  • The payment of commission from funds to supermarkets has been banned in relation to new investments;
  • Supermarkets must now charge separately for their services;
  • Fund managers have created 'clean' units with the commission stripped out of them;
  • Ongoing annual management charges (AMCs) are now typically 0.75%;
  • Once additional expenses, such as custody and audit fees are added, investors typically face an ongoing charge figure (OCF) of around 0.85%.

You will then pay for the services of your fund supermarket separately. This could be a percentage of your savings, or a fixed fee in pounds and pence. 

Fund supermarkets: 'super clean' funds

Another way to potentially bring down costs is to use a fund supermarket that offers so-called 'super clean' funds. 

One of the benefits of the changes to the way fund supermarkets charge is that their interests are now more closely aligned to investors, rather than to the fund managers that used to pay them commission. 

Hargreaves Lansdown, which has more than 600,000 clients, has used its significant clout to negotiate a range of cheaper funds, with an average saving of 0.17%.

However, as Hargreaves Lansdown is relatively expensive compared with its peers, charging a headline rate of 0.45%, investors will need to do their sums. Of course, investors will also need to be attracted to the relatively small range of 'super clean' funds available.

Fund supermarkets: investing in low-cost trackers

Actively managed funds, where fund managers use their judgement to pick investments in the hope of beating the market, still come with hefty charges. When you consider that few managers actually achieve market-beating returns on a consistent basis, 0.85% charges can often mean that you end up with below-average performance.

One option that growing numbers of investors are turning to is to invest in low-cost index-tracking funds. These aim to deliver market-like returns and track indices such as the FTSE 100 and FTSE All Share. Index funds will always slightly underperform the markets they track because of their own charges, but there has been plenty of competition in this area in the past few years. 

For example, it is now possible to invest in FTSE All Share trackers for as little as 0.07% a year. So the cost of a £10,000 portfolio could fall to as little as £35 a year (assuming a 0.25% fund supermarket charge and a fund charge of 0.1%).

Fund supermarkets reviewed

To help you find the right fund supermarket, Which? has created unique review pages for 15 of the major providers in this market. Our reviews tell you how the different companies charge - and how much - and this is complemented by our unique customer satisfaction ratings, in which more than 1,000 Which? members have rated fund supermarkets for customer satisfaction and other aspects of their service. 

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