SCOTS who want to manage their own investments may be in thrall to a limited number of online platforms that make shopping around too difficult and expensive, an investigation has found.
Switching investment platforms is “too complex and time consuming” with investors facing steep fees if they want to ditch their existing provider, according to a report published by the Financial Conduct Authority (FCA) this week. Platform users also have a hard time comparing value across the market due to a bewildering array of fees and myriad approaches to setting and describing them.
This might explain why most investors have never moved platforms, the FCA suggested, with 29 per cent not knowing whether they pay charges or thinking they do not pay any.
Fees can make a huge difference over time. Investors putting £5,000 into a stocks and shares Isa could be charged anywhere between £10 and £120, with a potential £650 difference in returns over a five-year period.
European regulations introduced earlier this year – known as MiFID II – were designed to clean up investment charges, but the FCA said that platforms still need to improve how they present their costs.
Online platforms have capitalised on a growing zeal for do-it-yourself investing over the last five years, driven by improving technology and greater pension freedoms granted by the Government in 2015.
But even the savviest DIY investors struggle to find the best-value home for their favoured funds or shares in a market where a small number of companies capture most of our money.
The FCA report was expected to be harsher about the platform industry, now worth £500 billion, following the regulator’s more damning indictment of the UK’s asset management industry in recent times.
Nonetheless, the FCA wants to ban exit fees, introduce mandatory time limits for switching and push the industry to be much clearer on charges. It is now consulting on the suggestions and aims to start any crackdown next year.
Shares in Hargreaves Lansdown, which has a 40 per cent share of the whole platform market, fell by 4% in early trading on Monday, though they have since recovered as the firm averred it was at the “forefront of making transfers between providers…easier and quicker”.
Hargreaves Lansdown charges £25 per stock to move to another fund platform and it also has a closing fee of £30. Rival platform Selftrade, meanwhile, charges £15 per holding if you want to switch, while the cost is £10 at Charles Stanley and Interactive Investor. But the likes of Cavendish Online, Vanguard Investor and Fidelity do not have any exit fees.
The costs you incur also depend on the kind of transfer you make – cash or “in specie”. If you want to keep your investments intact while switching platforms, you will have to choose the latter and charges across the different platforms vary massively.
Cash is usually the quicker of the two but this involves liquidating your investments and carrying the cash value over to the new platform, where you will have to rebuild your portfolio. That means dealing charges will apply on both your old and new platforms if you have shares.
There is also the danger that you will keep holding the cash – to your long-term financial detriment. The FCA reckons that investors held £16bn in cash on investment platforms last year – the equivalent of 8.8% of total assets under management.
The report said: “Even where consumers make a conscious choice to hold cash they may not realise the cost of doing so through platform fees charged on their cash balance, potential lost investment returns or potential foregone interest.”
Another factor to consider is the ongoing cost of using a new platform. Platforms tend to charge either a fixed fee or a percentage of assets under management. Those with smaller portfolios – under £25,000 in an Isa, for instance – should avoid fixed fees, which become better value as you invest more.
It may also be worth checking if you have a forgotten investment – particularly one taken out with a financial adviser in the distant past. The FCA report highlighted the treatment of so-called “orphan clients” left stranded on investment platforms by their former financial advisers.
Over 400,000 people have been disowned by advisers, with their assets shunted onto online platforms, after regulations introduced in 2013 made them unprofitable clients. The FCA warned that these investors are particularly vulnerable to high charges and poor service, with 10,000 customers paying extra fees amounting to more than £1.2m every year.
Platforms could be pressurised into moving these clients onto better terms, as well as contacting them to check if they are paying for financial advice they are no longer receiving.
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