Research suggests competition in the DIY investing market not working as well as it should

Recent research conducted by Boring Money on behalf of DIY investment platform Interactive Investor is critical of the sector as it found that the wide differential between the highest and lowest-cost platforms could result in outcomes to investors that can vary by more than the average UK salary.

Boring Money studied the impact of charges over 30 years on an average stocks and shares ISA balance and found that customers of the lowest-cost platforms would be £33,000 better off when compared with the highest-cost platforms.

Its research assumed an average ISA balance of £51,306, no additional contributions, and six trades a year for rebalancing – the average number of trades per year an Interactive Investor stocks and shares ISA customer currently makes; it factored in 5% annual growth after charges and assumed a 50/50 split between funds and shares.

The research found that Halifax Share Dealing delivered the best outcome for investors with pots greater than £50,000, with a total investment value over 30 years of £215,730; the sponsor of the research came second at £215,580.

Fidelity customers would achieve £205,460, Charles Stanley Direct £200,970 and Tilney Bestinvest £195,280; often criticised as ‘expensive’, but claiming to be ‘reassuringly so’ due to its level of customer support and constantly evolving proposition, according to the test criteria, Hargreaves Lansdown customers could expect to return just £182,700.

‘a customer in the lowest cost platform would have £52,000 more in their ISA at the end of this period than an investor in the highest cost product’

Boring Money then recalculated by assuming additional annual contributions of £10,124 (the average stocks and shares ISA subscription in the 2017/8 tax year, according to HMRC) and found the impact of charges over 30 years was even greater; a customer in the lowest cost platform would have £52,000 more in their ISA at the end of this period than an investor in the highest cost product.

Boring Money assumed one twelfth of this sum was invested each month into one fund and one share (24 trades p.a.); Halifax customers again came out on top with £908,300 after 30 years, with Hargreaves Lansdown and Bestinvest at the bottom at £867,500 and £856,280 respectively.

In extolling the benefits of its fixed fee structure, Chie Exec of Interactive Investor, Richard Wilson, said the idea that bigger pots bring a greater workload or increased costs for platforms was ‘nonsense’, adding: ‘The platform industry has a dogged obsession with percentage fees, and this research lifts the lid on why. Essentially, the more money a customer has in their pot, the more they will tend to pay in charges.

‘Obscure platform charges serve only to reinforce the feeling that somewhere in the chain we are being ripped off.’

Holly MacKay, Chief Executive of Boring Money, told FT Adviser that competition in the DIY investing market was not working as well as it should: ‘I have been working with investment platforms for 20 years now and I struggle to work out what I would pay on many platforms who have complex structures with multiple parts. Trying to compare like with like is unacceptably complex.’

‘Trying to compare like with like is unacceptably complex’

Ms Mackay said that most cost comparisons only looked at a single year period but that over a longer timeframe the choice of platform could make a significant impact on the end value of someone’s life savings.

However, Magnus Wheatley, MD of Charles Stanley Direct, questioned the validity of the research, saying: ‘Cutting data to suit individual platform pricing is fraught with pitfalls. No two investors are alike and savvy clients select their platforms based on the features that different platforms offer.’

Mr Wheatley told FT Adviser that his company had a loyalty scheme which ‘aggressively’ cut rates and waived the ISA platform fee for clients making one chargeable trade per month – a total of £138 per year – saying: ‘a client could hold several million pounds in an account and only be charged this sum.’

Representing Hargreaves Lansdown, Head of Communications, Danny Cox agreed that investors needed to choose the provider that offered the best value for them, based on their individual requirements, adding: ‘our clients value the excellent service, investment tools and research, the extensive choices, the full range of tax wrappers, the mobile app and now the new active savings service.’

On behalf of Bestinvest, MD Jason Hollands said different fee structures worked well or less so dependent on the level of assets held: ‘Fixed fee structures or those with minimum thresholds can be particularly costly for investors with more modest amounts to invest – like the vast majority of the public who are actually on average earnings.’

Alan Chan, of IFS Wealth & Pensions, told FT Adviser that charges were an important consideration when choosing an investment platform as they acted as a drag on investment returns, but that they were not the only consideration: ‘It is the same reasons why we don’t all shop at Lidl. Other factors like fund choice, fund share classes available, ease of access, financial stability and so on also play an important role.

‘For instance you may find a platform that is cheaper but it might not have the fund you want to invest in or, if it does, you cannot invest in the lowest cost share class.

‘Alternatively, it could simply be that the platform does not have a smartphone app to monitor your investments or customer service is very poor.  It’s important to consider the whole package of what you are getting for your money.’