Analysis: The costs of holding investment companies on platforms

Money

Platforms are wonderful. That’s not a sentiment you’ll hear very often, but nevertheless, we should take a moment to appreciate the easy access they offer to a galaxy of investments, and the amount of our time they have freed up to do meaningful work, instead of the paper form-filling that was necessary in a bygone age.

But just because platforms are wonderful, it doesn’t mean they’re perfect. In particular, the utopian vision of the platform as a one-stop shop for any investment you might wish to buy hasn’t quite come to pass.

Two major platforms, Cofunds and Old Mutual Wealth, do not offer investment companies (aka investment trusts) and ETFs. Both have said they plan to in future, the former as a result of its acquisition by Aegon.

A less obvious barrier to accessing these investments is a platform’s charging schedule. Some platforms do not differentiate in their charging structure between open-ended funds, investment companies and ETFs – AJ Bell Investcentre, Alliance Trust Savings and Ascentric are examples. But many others do, so that the decision to include investment companies and ETFs in a portfolio may lead to an increase in platform costs.

The unfortunate result is that a decision which should be made purely on the basis of what is in a client’s best interests is coloured by the differential charging structures of some platforms. I’m not suggesting there is anything deliberate or sinister about this. Like most things, the platform industry might look very different if someone were to design it from scratch. But when I meet advisers who don’t use investment companies and ask them why, the word ‘platform’ crops up in their answer far more often than it should.

If you want to resolve a problem, first you need to understand it. That’s why the AIC commissioned platform specialists the lang cat to take a comprehensive look at the costs of holding investment companies on all the major adviser platforms. We also looked at the costs of holding open-ended funds, and mixed portfolios of open-ended funds and investment companies.

The research covers various scenarios. The first set of scenarios relate to a buy-and-hold strategy, held outside a model portfolio, with just four transactions a year. Below, you can see the annual charges, as a percentage of client assets, for holding a 50/50 per cent portfolio of funds and investment companies*. As with all the lang cat’s heatmaps, green is cheaper and red more expensive.

Clearly, there are two inputs into these figures: custody charges and trading fees. Trading fees vary between £2 and £25, but at the larger portfolio sizes, of course, it’s custody charges that make the biggest difference, especially in this buy-and-hold scenario. If you look at the three cheapest platforms at the £500,000 level, for example, Alliance Trust Savings has flat fees, while AJ Bell and Hubwise have core charges of 0.2 per cent with tiered charging and/or caps in place at larger portfolio sizes.

That’s not to say trading charges aren’t important. While they generally vary between £2 and £25, three platforms (Alliance Trust Savings, Raymond James and Seven IM) offer ‘free’ trading in investment companies – in other words, it’s included in the custody charges.

Arguably, trading costs become more important in a model portfolio scenario with regular rebalancing. There is some good news about model portfolios, which is that out of the 17 platforms that offer investment companies, 15 allow them to be held in models. But of these 15 platforms, seven offer no reduction on their normal trading rates for investment companies held within models. That may make holding investment companies in models less cost-effective.

The following table shows the costs of investing in a model portfolio with 10 equally weighted holdings, of which five are funds and five investment companies. Rebalancing is done quarterly to correct a 2 per cent drift.

The first thing to notice is that the gap between the cheapest and most expensive platforms in this model portfolio scenario is appreciably wider than in the buy-and-hold portfolio we looked at earlier, especially at the smaller portfolio sizes. That’s a reflection of the fact that some platforms apply their standard transaction charges for ad hoc trading to model portfolio rebalancing, while others have lower charges.

But at some platforms, it costs the same or almost the same to hold investment companies in models as to execute the buy-and-hold strategy. This is because trading is either free, or greatly reduced within models.

The overall picture that emerges from this research is not one of perfection, but of a wide range of choice for different advisers and different clients. There are platforms to suit all investing styles.

It is also clear that some platforms are ‘friendlier’ than others for those whose investment approach leads them beyond unit trusts and oeics. But the landscape is changing all the time, and the direction of travel is towards offering a wider choice of investments at a more reasonable cost.

Nick Britton is head of training at the AIC

* The heatmaps in this article look at the costs of investing on a platform for one year. Calculations include ongoing platform fees, any additional wrapper charges and trading where applicable. Where assets are between £25,000 and £50,000 it is assumed that investment is in an ISA, above this level a 25/25/50 per cent split between ISA, general investment account and pension is used. Raymond James does not have an on-platform pension, therefore it has not been included in the mixed wrapper calculations. Data is based on publicly available charging structure information with some details verified via conversations with platforms in August 2017. Last updated 13/10/17.