How to avoid pitfalls of having all your eggs in one basket
AWHIRLWIND of financial reforms that impact on taxfriendly pensions and Isas is expected to push up the number of investors who switch between companies that hold their stocks and shares. Platforms – companies allowing customers to hold and change their investments under one umbrella – were forced by the City regulator to be clearer about charges, prompting some to cut prices in a bid to undercut rivals.
Barclays Stockbrokers, for example, is offering cashback of up to £2,000 until the end of this month.
Meanwhile, those aged 55 and over with defined contribution pensions will have far greater control over managing their pension pots from April.
And last July the annual limit for how much an individual can save into an Isa was raised by more than £3,000 to £15,000, and will increase in the new tax year in April to £15,240.
But platforms operate a menu of prices, making comparisons and switches tricky. Here are five common pitfalls investors need to be aware of:
1 MIND TRANSFER FEES
SOME platforms penalise investors for switching to a rival. Matthew Morris, director of financial specialist Carr Consulting and Communications, says: ‘Consumers can be hit by charges they didn’t expect and the process can be far from transparent.
‘Once an investor transfers cash into a platform they may not be able to take it out again without incurring penalty charges.’
For example, Tilney Bestinvest charges £25 per holding – each share or fund – to transfer out to a rival plus a £50 platform closure fee, while Hargreaves Lansdown charges £25 for each transfer and £30 for the platform closure. ACTION: Some platforms charge nothing for transfers out, such as Fidelity Personal Investing, while others eager for your business will contribute towards the cost of exit penalties charged by the old platform. For example, AJ Bell’s Youinvest pays up to £500 in exit charges if you transfer £20,000 or more to the company; The Share Centre pays up to £300 for transfers of £1,000 or more; and Fidelity up to £500 for £1,000.
2 RE-BUYING SHARES IN AN ISA CAN BE COSTLY
SHIFTING existing shares held on one platform into an Isa on a rival platform requires investors to sell the shares and re-purchase them within the tax-friendly wrapper.
The cheapest way to manage this process depends on how much a platform charges you to buy and sell shares – known as dealing charges – as well as how much the old platform charges you to leave. ACTION: Find out the dealing charges and exit fees applied by your existing platform, and the dealing charges and joining fees levied by the company you want to switch to.
Research by Carr shows that if you were transferring from Fidelity to discount broker Clubfinance it is better to transfer funds first before re-purchasing the shares. This is because Fidelity has no exit or transfer fees but has higher dealing charges at £9 per deal compared to £2.50 with Clubfinance.
In contrast, if you were to transfer from Fidelity to Hargreaves Lansdown, it is better to re-purchase the shares in an Isa first and then transfer – because Hargreaves Lansdown’s dealing charges are higher at £11.95 each.
3 DEALING BY PHONE COSTS MORE
CHARGES for ditching funds in your portfolio in favour of others can be as much as £25 per trade in some cases if it is done over the phone. If the same trades are completed online, the cost is likely to be cheaper. ACTION: If you are not comfortable trading online, check the rates for phone dealing before switching to a new platform. The likes of Strawberry Invest and TQ Invest charge the same for dealing over the phone as they do for transactions completed online.
4 COMPARING PLATFORMS IS A PUZZLE
BEYOND cost, key factors to consider are the quality of research and investment options. Less confident investors should prioritise using a platform with easy-to-grasp tools and information about investment options, while sophisticated investors should opt for the cheapest route.
Justin Modray, of independent financial website Candid Money, says: ‘Cost is important but bear in mind service and investment choice too. Some of the cheapest platforms, such as I Web, offer basic services which may be less suited to novice investors.’
Costs can also be confusing – with some platforms charging fixed annual fees while others levy percentage-based fees. ACTION: Modray says investors with smaller portfolios should look for a competitive annual percentage platform fee with no fund dealing charges. You can compare using websites such as comparefundplatforms or The Platforum.
5 INVESTING ON YOUR OWN IS NOT SUITABLE FOR EVERYONE
DEPENDING on your choice of platform, DIY investing can prove a cost-effective way of building up a nest egg.
It is perhaps the best option for those of modest wealth and straightforward financial affairs.
But for time-poor investors with bigger portfolios and complex financial arrangements, professional advice may be better.
Kevin Hughes, of independent financial advice group Westminster Wealth Management, in Central London, says: ‘We would always recommend investors take proper financial advice before committing themselves to a DIY investment platform.’ ACTION: To find an adviser, use free search tools from websites such as unbiased, VouchedFor and Findanadviser.