A number of fledgling investors have been wondering whether they should postpone their first plunge into investing because of the upheaval caused by the Retail Distribution Review (RDR), going by the chatter we hear in the Monevator comments and across the forums.
Switching brokers is possible, of course, but it equals hassle, pain, and expense.
It’s enough to make you stay in cash. Don’t let it!
RDR 2: The FSA Strikes Back
For starters, the new rules on platforms aren’t due to come into force until we’re partying like it’s 2014.
- RDR Part One ends hidden payments to Independent Financial Advisors (IFAs) on 31 December, 2012.
- RDR Part Two is going to kybosh stealth payments to platforms by 31 December, 2013.
If all goes according to plan, platform fees will be deducted in plain view from our cash accounts, rather than being sneakily siphoned off via a fund’s Ongoing Charge Figures (OCF).
The idea is that explicit charging will sting, and so cause us to ask searching questions about levels of service.
But the Financial Service Authority (FSA) is still pondering over the final draft of the rulebook. It hasn’t given a precise date for a decision. It may still change its position or delay RDR Part Two altogether. It has form.
What’s more, the FSA is itself going to be abolished and replaced by new authorities – supposedly in early 2013.
It may well feel like the last week of school in there.
Every day counts
Let’s say it takes another year for the FSA – or its successors – to pronounce a verdict, for the platforms to fully respond, and for the dust to settle on a new pricing landscape.
The FTSE All-Share has gone up 13% in the last 12 months. Assume, for the sake of argument, this performance is repeated over the next 12 months.
As a newbie investor, even with only £500 invested, you’d still be up on the £50 or so it would cost to transfer to a new platform with a couple of funds in your portfolio, should you choose to invest now and move if you need to later.
I’m not pretending I know the market is bound to soar over the next 12 months. It could just as easily crash, or flatline like an Ed Miliband joke.
But either way it’s a mistake to allow a minor detail like saving a few quid on platform fees to be the tail that wags your investing dog.
Dithering could cost you the few days in the year that the market goes on a tear. And if your platform proves uncompetitive then transferring out isn’t the end of the world.
Of course, if you’re getting cold feet for some other reason, then that’s perfectly understandable…
An upheaval like RDR risks more unintended consequences than traveling back in time and chatting up your nan.
Here’s a few of the potential googlies that could keep investors on the hop for a long time yet:
- RDR may run foul of the EU’s decision not to ban commission in its MiFID II review. That leaves open the possibility of European platforms selling funds to UK investors while eluding the clutches of RDR.
- Some execution-only brokers will slip through the loopholes created by the FSA’s definition of a ‘platform’. These brokers may well be able to rebate commission in cash with the FSA’s blessing. A final decision has yet to be made.
- The FSA is also considering allowing platforms to rebate fees as units rather than cash. In other words, they might compete by offering us bonus shares in our funds.
That last one beggars belief, as the FSA has already expressed the view that trail commission is used by fund providers to buy preferential marketing treatment on platforms.
If rebates still exist in any form then that practice is likely to continue by another name.
What to do now
Of course, none of this pondering solves the problem of finding a good home for your investments today.
My best suggestions for no-fee or low fee brokers can be found here. You can partially prepare for the future by choosing a platform that’s already declared its hand on RDR.
Remember the answer to any investing question is about as straight as a journalist in front of the Leveson inquiry, but for passive investors who want to buy index funds in an ISA:
- Cavendish Online – Claims its no-fee model is likely to survive RDR. It charges nothing bar the TER. You can’t buy ETFs though, should you fancy it.
- TD Direct Investing – No charges if you have over £5,100 in your portfolio. Otherwise it’s £36 a year. No dealing fees for funds.
- Selftrade – Beats TD Direct if you’ve got less than £5,100 and will definitely trade once per quarter. Otherwise the inactivity fee is £10 per quarter. Funds are free to buy, but not to sell.
- Hargreaves Lansdown – Platform charges are £24 per fund per year. No dealing fees. It makes sense if you want a portfolio consisting of one or two funds you can’t get from the first three platforms (e.g. Vanguard LifeStrategy).
- Alliance Trust – Platform fees are £48 per year and you can buy funds at £1.50 if you make regular investments. Beats Hargreaves Lansdown if you want Vanguard, hold more than two funds, and make eight or fewer regular purchases a year. Otherwise look at Bestinvest.
Note, I haven’t exhaustively searched all 100-odd execution-only brokers in the market. I gotta go eat soon. But this is an informed snapshot. If you can find a better RDR-friendly deal then please let us know in the comments below.
Finally: More Vanguard options
It’s also worth mentioning when choosing platforms that the Vanguard funds will now be much more widely available, as it has struck a deal to appear on Cofunds – the platform that lies behind many broker’s online convenience stores.
Platform fees will apply, potentially along the lines of Cofunds’ Explicit Charging Structure, which amounts to a £40 annual fee plus 0.29% on the first £100,000. That will be a mighty wallop if your platform doesn’t cap it.
So that’s the long of it. The short of it is: it’s a mess but don’t let RDR put you off the investing fun. Monevator will be here to help keep you up to speed.
Take it steady,
- Why RDR is painful for passive investors
- In search of the best online broker
- ‘Clean’ HSBC index funds are pretty messy