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21 Feb 2020

Could switching investment providers boost your savings?

Two fifths of investors won't switch providers because of high exit fees

More than a third of investors have been with their investment provider for 10 years and over half of these admit they have never considered switching, according to new research from Netwealth.

Just under two-fifths of investors won't change their investment provider because of high exit fees, while half don't want the extra hassle or stress.

While exit fees can be high, investors could save more money in the long-run by going elsewhere, as costs and charges can make a big impact on the value of your pot.

Here, Which? explains how investment provider fees work and whether you could save more money by switching.

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What fees do platform investors pay?

An investment platform, sometimes called a fund supermarket, is essentially an online service that allows you to buy, sell and hold funds.

It's important to note that if you invest through a fund supermarket, the charges displayed by a fund manager are not the only ones you need to consider.

Rules introduced in 2014 mean fund supermarkets must charge a separate fee for their services, which come in two forms:

  • Flat fees - a fixed payment each year
  • Percentage fees - a percentage of the value of investments you hold.

If you have a relatively small portfolio of say, £50,000, a percentage-based charge will generally work out cheaper, while large portfolios fare better with a flat fee.

We have outlined below the different charges you may face.

Ongoing charges

When you invest you'll have an ongoing charges figure (OCF), to give an indication of the cost of investing in a fund.

This includes the annual management charge (AMC), which is usually made up of a number of different costs and typically ranges between 0.75% to 1.25% in most actively managed funds - funds in which a manager or management team makes decisions about how to invest the fund's money.

Meanwhile passively managed 'tracker funds' - which are automatically selected to match an index or part of the market - tend to have lower AMCs, starting from around 0.1%.

The OCF also takes into account other additional costs such as trustee and auditor fees that are taken directly out of your fund. These funds can easily add about 0.1% on top of your AMC.

The OCF does not include things such as performance fees, as these will vary depending on how well the fund performs. Performance fees typically take an extra 20% of everything above a certain level of performance.

Exit fees

Most platforms also charge you exit fees for closing your account.

Whether or not this is a barrier to switching providers depends on the size of your pot - as exit fees come in different guises. Some platforms charge based on the number of investments, some charge a flat fee by product and some charge both by product and number of investments.

A number of platforms don't have any exit fees such as:

  • Hargreaves Lansdown
  • Interactive Investor
  • Fidelity

It's worth mentioning that other platforms could follow suit, as the Financial Conduct Authority (FCA) is due to consult on banning investment platforms from charging exit fees, describing them as a 'major barrier' to competition.

How much could you save by switching investment provider?

Netwealth says that it's the all-in costs and charges in particular that can erode returns over a 10-year period.

For example, it found with £500,000 worth of investments in a 'moderate' risk portfolio, a reduction of 1% per year in total charges amounts to a saving of £75,000 over 10 years, rising to £240,000 over 20 years.

We've done our own research into how £1,000 in a fund costing 0.1% and a fund costing 1% would perform in three different investment performance scenarios, ranging from poor (5% loss), to neutral (0% growth) to good (5% growth).

Which platforms have the lowest charges?

Ultimately, the cheapest platform for you will depend on your investment style and the size of your portfolio.

We have put together some estimates of potential investment costs when using an investment platform over the course of a year.

The costs assume you only buy funds (shares work out slightly cheaper with some companies), and make four purchases and four sales each year.

For example, if you have a small portfolio with £10,000 invested, the cheapest platform over the course of a year would be Vanguard - a Which? Recommended Provider - at £15, while the most expensive platform would be Alliance Trust Savings at £200.

However, if you have a large portfolio, with £250,000 invested, Vanguard charges £375, and Alliance Trust Savings charges £200 a year.

The Halifax Share Dealing platform would be the cheapest option at £113, while on the other end of the spectrum AJ Bell Youinvest - a Which? Recommended Provider - charges £637 for a £250,000 pot.

AJ Bell Youinvest for a £10,000 portfolio would cost £37 a year, meaning it could be a suitable option for those with smaller pots.

However, you should not just look at fees when deciding if you should switch.

Investment platforms aren't just divided by price, but also by customer service, investment choice and ease of access. So it's important to consider all these factors if you wish to switch.

Is it easy to switch investment provider?

How easy it is to switch platforms depends on your current provider.

To switch providers, you need to contact them and fill out a transfer form to move your account.

Switching generally takes between two weeks and a few months in most cases.

But you should be aware that this is not always the case and for some, there are longer waits due to the complexity of the assets being transferred.

Should you consider financial advice?

Some investment brokers offer regulated financial advice for an additional fee. For example, Hargreaves Lansdown runs its fund supermarket, offering clients generic information through regular newsletters and online updates as well as the standard fund data.

But investors who do want individual advice can contact an adviser and obtain this for an extra fee.

Getting financial advice to switch your investment provider can be crucial, so you don't end up with something unsuitable.

As long as advisers are using platforms to benefit their clients, fund supermarkets are an acceptable part of independent advice. However, advisers should use more than one platform.

A financial adviser can scour the market to find investments and products that are tailored to your circumstances, and help you to plan for your financial future.

Financial advisers are regulated by the FCA and must adhere to a strict set of codes. You can check the FCA register to ensure an adviser is properly authorised.

Which? reviews of investment platforms

To help you find the right fund supermarket, we have created unique review pages for the major providers in the market.

Our reviews can tell you how the different companies charge - and how much - plus you can see our unique customer satisfaction ratings.