Fund supermarkets - how to invest in cheap funds How fund supermarkets work
When you're making a decision on investment, we strongly advise you to seek independent financial advice. An adviser can help you identify your financial goals and assess your attitude to risk.
However, if you do not wish to see an independent financial adviser (IFA), investing through a fund supermarket or discount broker is one of the best ways to get access to a wide range of investment products, monitor your portfolio, invest tax efficiently and reduce charges and administration.
What are fund supermarkets and discount brokers?
A discount broker, much like a stockbroker, will facilitate your investment into funds, like unit trusts and OEICs.
A broker will use a fund supermarket, which acts as a hub to provide funds to brokers, who in turn sell them to investors and negotiate discounts. This 'platform' gives extensive information on each fund, including which companies your money is invested in, historical and recent performance and investment goals. Some fund supermarkets, most prominently Hargreaves Lansdown, deal with investors directly.
What investment products can you hold in a fund supermarket?
Some fund supermarkets will only offer unit trusts and OEICs (open-ended investment companies). This is because they receive commission from fund managers, some of which they pass back to investors as an annual discount or 'loyalty bonus'.
However, the Financial Conduct Authority (FCA) has announced that from April 2014 commission to fund supermarkets will be banned in relation to new business. As a result, ongoing fund charges will come down and fund supermarkets are likely to introduce separate account fees for their services. Fund supermarkets will have until 2016 to offer existing investors commission-free funds.
Other fund supermarkets also offer access to stock exchange listed investments, like shares, investment trusts and exchange traded funds (ETFs). It's important to remember that as these investments do not pay commission, their charges (although lower than unit trusts) will not be discounted.
Fund charges explained
Fees are a major consideration for investors. A good fund manager may help to smooth market turmoil or achieve market-beating returns, but with initial charges of around 5% and annual fees of 1.5% or more, they can take a hefty chunk out of the profits they help to deliver. These costs can have a significant impact - learn more in our guide Are fund charges eating into your returns?
Because most fund managers are happiest handling large sums, they rely on fund supermarkets, stockbrokers, or IFAs, to bring together individual investors.
Traditionally, these companies have been paid by commission, receiving a share of fund charges - usually the initial charge and an ongoing annual payment of 0.5% called trail commission. It's these charges you'll be able get discounts on. Find out more about these discounts in our guide to How much you can save with fund supermarkets.
The new FCA rules mean that the traditional fund supermarket business model will have to change from April 2014.
Investing tax-efficiently using a fund supermarket
As well as offering discounted funds, brokers can allow you to put your fund investments inside a tax-efficient wrapper - normally a stocks and shares Isa or a Self invested personal pension (SIPP). This is usually provided by the platform.
The amount that can be invested in an Isa is restricted by HMRC. For 2012/13 the maximum is £11,280. If you open a cash Isa, then up to £5,640 can be held in this and the remainder in a stocks and shares Isa
Investments held in a stocks and shares Isa pay income tax-free (although dividends are still taxed 10% at source). There is no capital gains tax with either Isas or SIPPs.