After last week’s dramatic unveiling of the Dumb Investor and picking over the bones of the mess he – or rather I – left, I’ve now got to start taking some decisions before I transform a rag-tag collection of shares and trusts into a more coherent portfolio of funds.
I’ve got some simple rules for this portfolio. As befits a column in Funds Insider, it will be made up of funds, maybe with the odd exchange-traded fund thrown in. Investment trusts and shares won’t feature, so that means everything in Dumb Investor’s portfolio must go.
That at least brings a clean break with what’s gone before, but it’s not without its costs. Specifically, £107.55, as I’ll incur an £11.95 transaction charge for each of the nine holdings I sell.
The thought did occur to me that I could swerve this charge with the clever ruse of moving the funds to another platform with lower transaction charges. But that plan is not a goer: in specie transfers, the fund industry’s lingo for moving investments from one platform to another without selling in or out of them, cost £25 per holding from Hargreaves Lansdown. That’s more than double the transaction charge, and would cost me a total of £225.
Even had that charge not put me off, there’s the fact these sorts of transfers take two to four weeks, which would not have made for the most engaging of columns over the next month. And do I really want to tie my fortunes to Dumb Investor’s portfolio for any longer than I have to?
Plus, there’s no obvious alternative platform which would allow me to dramatically cut this cost, which represents less than 0.5% of my £22,335 portfolio. Fidelity, AJ Bell and Interactive Investor charge around £10, Bestinvest and Willis Owen are cheaper at £7.50, and Strawberry and Halifax Share Dealing are more expensive at £12.50, according to Compare Fund Platforms. That leaves Close Brothers’ £8.95 charge and the alluring £5 from iWeb.
Reviewing my platform choice
But I’m getting ahead of myself. My choice of platform should not be dictated by a series of small and non-recurring transactions. Now does seem a good time to examine whether Hargreaves Lansdown is best for me, though, before I embark on my funds journey.
The fact that the UK’s largest online stockbroker is not its cheapest will not be news to many. There are ways it can be cheap: if you invest in a portfolio of investment trusts and don’t trade that often, for example, it can work out as exceptionally good value. In a funds and shares account, after paying the transaction charges for buying them, there’s no charge for holding them, and the £45 and £200 caps on the 0.45% charge in its ISA and Sipp mean there’s effectively no charge on holdings above £10,000 and £44,500.
For a funds investor, no such caps exist. It’s 0.45% in any of the wrappers, only dropping to 0.25% for holdings above £250,000, a largely academic consideration given my portfolio size of less than a tenth of that.
I used the Compare Fund Platforms tool to see how Hargreaves Lansdown’s charges on a funds and share account compare to those of others. This asks you a series of questions about your portfolio: how big it is (£22,335), what regular savings you are planning (none), how many funds you will hold (10, just for the sake of this exercise) and how many trades a year (six, on the basis I might switch three).
Will I hold shares? I might hold a couple of ETFs, which trade as shares and are treated as them for platform charging purposes, but they are unlikely to form a major part of the portfolio. I’m not ruling out passive funds, but if I go down this route I won’t know if I’m going to pick a tracker or an ETF until it comes down to the specific investment decision. So I’ll say no for the purposes of this exercise, which illustrates the difficulty of accurately comparing platform charges unless you are sure of the exact portfolio you are building.
I’m assuming I’m running the portfolio for five years: not only is that the minimum recommended period for holding funds, but it seems a decent estimate of the lifetime of a column. And that I’ll make 7% a year, for no other reason than that was the default answer given by the tool.
Unsurprisingly, Hargreaves’ 0.45% charge means it appears lower down the table, ranked from cheapest to most expensive, costing me £653 over the five years. iWeb is by far the cheapest, at £284: it doesn’t charge an account fee, only a £25 set-up charge and £5 for every trade. So saying I stuck to my fairly arbitrary assumptions, I would be paying £75 to get started, including that £25 fee and £50 buying 10 funds, then a further £30 a year for my three fund switches. Compare Fund Platforms calculates the cost as the difference between the size of my portfolio with and without charges: given the assumed 7% annual growth, that explains why the cost is calculated as £284 rather than £225.
That’s a £369 difference between Hargreaves and iWeb, only marginally dented by the costs of leaving the Bristol-based broker, which, after I’ve moved all my investments into cash, would be:
- £25 to transfer to another provider (although if, like me, you don’t need to avoid ISA withdrawals, you could just take the cash out and reinvest with another provider yourself).
- £30 for Hargreaves to close the account (and they are wise to you just leaving £1 in there to avoid this – accounts of less than £250 left inactive for more than two years are liable to be closed, with the balance sent to the customer).
Rabbit hole of charges
I’ll admit this column has descended into a rabbit hole of the minutiae of platform charges, but that is the danger when comparing them. Platforms can trumpet their bells and whistles (if that’s not too mixed a metaphor) all they like, but unless you’ve actually used every one of them, you can’t properly gauge the actual investor experience on each.
I can judge from its website that iWeb’s pricing simplicity is matched by the simplicity of its offering: that’s no bad thing per se, just a reflection of its proposition: cheap and no frills.
And I know Hargreaves doesn’t have a monopoly on the slicker end of the platform market. Fidelity gets just as many ticks on Compare Fund Platforms’ listing of features, and comes in cheaper (£509), while AJ Bell would cost even less, at £438, and lacks only model portfolios, which I don’t need, according to the table.
But without descending into advertorial for the Bristol-based broker, its service levels do impress. Hargreaves Lansdown is not just the home for the Dumb Investor money but also Citywire’s Group Sipp pension. Any issues I’ve had have always been dealt with promptly, and I can’t say I’ve had any complaints. Yes, it’s always nice to trim charges, but it’s not alluring enough to make me switch from a service that’s been delivering. Feel free to tell me I’m wrong below though!
Satisfied that I’m happy where I am, I now need to sell Dumb Investor’s holdings, and think about where to invest the money. Given I’ve now written two of these Diary of a Funds Investor columns and not actually invested in any funds, that’s something I need to put right next week.
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