If you invest with a fund supermarket, it’s relatively easy to find out what you’ll pay – but lurking in the small print of many providers are sneaky clauses that snare you with high fees if you want to move your money elsewhere.
That should soon all change, as the Financial Conduct Authority (FCA) yesterday announced a shake-up of investment supermarkets that should make them work better for investors.
On the whole, the FCA’s investigation found fund supermarkets generally serve consumers, who’ve collectively invested half a trillion pounds via these services, well. But just 3% of consumers switch their investments each year, meaning many won’t be getting as good a deal as they could.
The planned changes ‘should make it less expensive and time-consuming for investors to shop around,’ says to Christopher Woolard, the FCA’s director of strategy and competition.
Here, we highlight the key proposals – and how they’ll help you get more from your investments.
1. Scrapping investment Isa exit charges
As Which? has long noted, many fund supermarkets have clauses that can make it far more expensive to leave than to join.
In some cases, they charge £25 per fund or stock you’d like to transfer, as well as extra charges if you have Sipp or Isa – meaning a portfolio of 30 funds could cost you £800 or more.
There are costs to fund supermarkets to process these transfers, but according to Interactive Investor, these transfer fees are hugely inflated, and can typically cost a fund supermarket £1 to process.
What’s not yet clear is how far an exit fee ban would extend. Some types of investments, such as insurance bonds or with-profit funds, are designed to be held for a fixed period, and are sometimes discounted if someone wants to leave early, so other investors aren’t penalised.
Similarly, ‘early redemption fees’, charged by St James’s Place on some investments for up to six years after purchase, may not be subject to a ban, as they cover the cost of initial advice, though they can still discourage some investors from leaving.
James Norton, senior investment planner at Vanguard, says: ‘We would be supportive of a wider exit fee ban going beyond platforms as that will help reduce the costs for investors and therefore increase their chance of investment success.
‘What is also crucially important is that charges are transparent and that investors are aware of any penalties when they buy a product. Redemption penalties should not be hidden in the small print.’
2. Faster switching investment Isa switching
Eye-watering exit charges aren’t the only reason it can be hard to switch investment supermarket.
Often, fund supermarkets can drag their feet when a customer asks to move their money elsewhere, with some insisting on physical paperwork, rather than processing transfers online.
According to the FCA’s research, 7% of DIY investors gave up an attempted transfer entirely after being frustrated by the process.
James Norton says: ‘Whilst the industry is working hard to improve the switching process (moving from one platform to another), progress is too slow. In the digital age it is not acceptable that transfers take so long.
‘Our experience is that the median transfer time is 17 days, but almost one in three transfers takes over a month. We are pleased that the regulator is focusing on this issue, but would like to see the implementation of mandatory transfer times on the industry.’
Transferring money from a financial adviser can take even longer still, says Anthony Morrow, chief executive of robo-adviser Evestor.
He says: ‘The whole process still takes too long in many cases, with some providers seeming to drag their heels before customers can transfer out.
‘On average, advised transfers to evestor take around 8 – 12 weeks from start to finish, but they can be much longer than this – one we dealt with took 11 months.’
3. Letting investors take their funds with them
Currently, some investors find that if they want to move to a different fund supermarket, they’re forced to sell all their investments, then transfer the cash to a new account, and then repurchase their investments on the other side.
That can be expensive – there are often dealing costs when you buy or sell funds, and it can also mean your money spends weeks out of the market – potentially leaving you worse off if the investments rise in value during the interim.
As such, the FCA is considering whether fund supermarkets should let people transfer their investments directly, without having to cash out first.
4. … and switching funds automatically when they can’t
However, in some cases, transferring your funds directly isn’t so easy.
That’s because some fund supermarkets, such as Hargreaves Lansdown, offer discounted versions of funds. If the fund supermarket you switch to doesn’t offer these discounted funds, then they can’t be transferred.
The FCA proposes that in these cases, the fund supermarket you leave should switch the funds to a version that can be transferred before you go.
However, Richard Stone, chief executive of the Share Centre welcomes the idea, but warns that these transfers shouldn’t be used as excuse to slow down a transfer – or inadvertently create a capital gains tax bill for the investor when the old funds are sold.
He says: ‘It is important any rules requiring the ceding platform to convert the units to a different class do not involve delay or a sale and purchase that could crystallise a tax liability for the investor.
‘This can and should be done seamlessly without leaving the investor un-invested at any point.’
- Find out more: Find the right fund supermarket for you