An obvious part of managing your personal finances is ensuring you don’t pay more than you have to. This sounds simple in theory but it’s actually where most of us fall down and waste thousands of pounds.
We all know that switching energy providers saves money but fewer than one in four of us actually does anything about it. Similarly, there are plenty of investors out there who have amassed beautifully crafted retirement pots and spent hours on stock selection but throw away their hard earned cash by being with the wrong broker.
I am reminded of this because of two very experienced investors we spoke to this week. Both have years of stock and fund picking knowledge but nonetheless got stung for thousands of pounds on fees on something available for a few bob elsewhere.
Fees, broker costs and small print matters. People of course prefer certain providers – brands they know and understand, which offer good service. But pitfalls on broker sites can be costlier than the difference between shopping at Aldi or Waitrose.
Fees matter. An investor with a £100,000 pot that grows at 4pc a year for 20 years will spend £395 more a year just on broker fees if they are charged 0.45pc instead of 0.25pc. This rises to £1,410 if they pay 1pc.
The brokers out there have all positioned themselves to cater for a specific type of investor. This is both an advantage and disadvantage. If you are the right investor then competition means you have a good deal. But if you are not, it's quite likely you're paying far too much.
There are a couple of classic pitfalls.
One is having significant sums invested in funds with brokers who charge an annual percentage fee with no cap.
Hargreaves Lansdown is the prime example. Its Isa charges 0.45pc on the first £250,000, 0.25pc on savings between £250,000 to £1m and 0.1pc on anything between £1m and £2m. For funds this is not capped but for stocks and investment trusts it’s capped at £45 a year.
On a £100,000 portfolio invested in funds you would pay £450 a year. At this point, you’re better off at a fixed fee broker such as Interactive Investor or Halifax Share Dealing. The same portfolio of funds at Interactive Investor would cost an investor £120 a year.
Hargreaves does not charge anything to trade funds, while Interactive Investor gives you 12 free trades a year and charges £7.99 for the rest, so you would have to trade a lot to make up the difference. This does not mean all investors should swap to Interactive Investor, I am merely using it as an example.
Hargreaves' fund fees from those with large savings is a huge source of revenue for the firm. However, it costs it no more to administer a portfolio of £100,000 than it does to host one double the size. Percentage fees may seem small, but they soon add up.
Of course, the opposite is true. Anyone using Interactive Investor to invest up to £50,000 in funds will be better off at the numerous brokers who charge percentage fees such as iWeb, Barclays Smart Investor, AJ Bell Youinvest, Hargreaves, Charles Stanley or Fidelity Personal Investing.
The second pitfall is trading costs. Fund trading is generally low cost or free at the biggest brokers and others will only charge small fees. Investors will small pots should stick to trading accounts that offer free trading and percentaged-based fees.
But buying and selling stocks is different. Brokers such as Hargreaves offer cheaper annual fees but charge £12 per trade. AJ Bell, and II charge £10 and £8 per trade respectively. Here, providers like IG Group and iWeb are more cost-effective options.
What will confuse investors is what “package” or “account” to have. Some will offer cheaper or free trades if you buy and sell regularly, and these are worth exploring. One Share Centre customer, for example, was unaware he was on the wrong type of account and spent nearly £3,000 on trading fees when a simple switch to “frequent dealing” tariff would have meant they only spent £61.
Investors must read the small print, do their research and find the right tariff for them. This means knowing whether you want to own funds or stocks, how often you expect to trade, how much you have saved and whether you want online and phone trading.
Customer service and availability of funds is also important. Many of you reading this will broker with Hargreaves for this reason. But you must ensure any additional cost is worth what you get back.