ISAs are promoted by the likes of Michael Johnson as a “clean” alternative to pensions. They are simpler to understand and easy to use, but are they clean?
Here is some research from my reliable friend Dan Norman describing the “journey” of your money.
• You are recommended the ISA investment by a financial adviser, an IFA or a private bank, which takes a commission.•The financial adviser passes it to a funds distribution platform (such as Cofunds) which may add a variety of charges, including initial charges, switch fees, trading fees, and tax wrapper (ISA) fees.•The funds distribution platform uses outsourced technology, for which it is charged a fee.•The funds distribution platform passes the investment to a transfer agent, which charges fees for out-of-pocket expenses, maintaining the account, updating the register of investors and passing the subscription on to the fund manager.•The fund manager places the investment in safekeeping with a custodian bank which charges an annual ad valorem fee plus fixed fees for settlement of transactions in the underlying assets, plus out-of-pocket expenses.•The fund manager appoints an independent fund accountant to value the investments held in the portfolio. It charges an ad valorem fee on the value of the assets under management plus transaction charges and sundry charges for audit and tax reporting.•Interactions between fund managers, transfer agents and fund distributors (such as IFAs) are routed via electronic message services such as EMX, Calastone, FundSettle, Vestima and SWIFT, which levy set-up fees and per message charges.•The investment process and the participants are monitored and reported on by the depositary bank or trustee – often the same organization as the custodian bank – which charges an annual fee.•At this point, the promoter of the fund may take an initial charge from the client for the investment. This can be a substantial amount: 5% or more is not uncommon. Promoters also levy exit charges for withdrawals from the fund.•The fund manager takes the newly injected cash to invest in the market. The manager charges an annual percentage fee on assets under management and, possibly, a performance fee.•The fund manager places a deal in the market to invest the new cash. This may involve paying a spread if the trade is placed directly in the market, or a commission to a broker-dealer.•If the trade is subject to tax (like stamp duty on equity trades) then this is taken from the fund via an adjustment to the trade consideration.•The broker-dealer may make a payment back to the fund manager as an inducement to trade with them. This is called “soft commission.”•The fund manager confirms the trade data with the broker-dealer through a trade matching service, such as those supplied by Omgeo or SWIFT, which levy further fees.•Settlement instructions are exchanged between the custodian banks to the buyer and the seller of the asset, and cash is exchanged for securities via electronic book entries at a central securities depository (CSD), which charges a settlement fee.•Cash is paid and received via accounts maintained at the central banks by the custodian banks, which charge settlement fees.•And we haven’t yet covered FX fees, securities lending, a Fund of Fund structure….
ISAs may look simple but so does an iphone. Neither are cheap!
There are some simple rules you can follow to keep yourself out of trouble. Trust your instincts. If you do not understand, ask and if you still do not understand, do not invest.
The simpler the product the cheaper. As we are constantly advised, cheaper is not necessarily best but long supply chains are rarely in the consumer’s interests.
If you discovered that you could buy Nestle gold blend in Tesco’s finest coffee (you can’t ) you’d pay the lower price per 100g. Unless you wanted to wave the Nestle jar around in the kitchen. you’d probably go for the Tesco own-brand product as you get the same coffee.
Much the same can be said for the prescription of generic drugs by GPs.
Consumers are savvy, they understand supply chains and will chose the short ones as a route to sustainable value.
This does not rule out spending money on flim-flam. Most people will pay a little extra to go to a hairdresser who is pleasant ; similarly the comfort of a trusted intermediary is a considered.
But before pressing any buttons , we need to separate what we are paying for comfort and whether this is an acceptable price.
Do not be brow-beaten. In this new web enabled world, you have the choice whose service you use.
Compare the attitude of the most famous funds platform, expressed in an e-mail to one of their clients yesterday.
Currently it is not possible to invest into ‘clean’ funds within the Vantage Service as at present there are no requirements for fund supermarkets to offer such funds. Until the outcome of the FSA’s decision making process surrounding how the Retail Distribution Review (RDR) will affect fund supermarkets has been finalised, we have no plans to offer these or change our current charging structure.
Any required changes to platforms (such as Vantage) have not yet been finalised and we are still in a consultation period with the FSA. We expect a decision from the FSA later in the Spring. Any new platform rules confirmed will then be expected to be introduced from 31st December 2013. If we do need to make changes our clients will be the first to know.
With this (from Citywire)
Informed Choice has unveiled the charging structure for its execution-only platform, IC Direct, which will be powered by Fidelity FundsNetwork.
The platform will charge a flat fee of 0.45% on assets per annum.
A £45 annual account fee will apply after the first two years on each new account and there are no initial or switching charges.
IC Direct only offers clean share classes and currently has 425 funds from 18 fund managers … The firm expects to have around 2,900 funds from 80 fund managers by the third quarter of 2013.
Martin Bamford …., managing director of Informed Choice, said: ‘We made the decision to adopt clean fund pricing from day one after our market research told us investors are disillusioned with the smoke and mirrors used by existing platform pricing structures.
‘This is an important step forward for the platform sector in terms of transparency, ahead of the regulator forcing existing discount brokers and direct to consumer platforms to clean up their pricing terms.’
I think I know which approach I prefer…
- In the customer’s shoes; Dan Norman on our fund fiduciaries. (henrytapper.com)
- Is this what your savings are paying for? (henrytapper.com)
- It’s a wrap trap – but who’s been caught? (henrytapper.com)
- Which are the best Isa fund supermarkets? (telegraph.co.uk)
- Isa price war hopes as trusts slash costs (telegraph.co.uk)
- Q&A: Should I switch my Child Trust Fund to a Junior Isa? (telegraph.co.uk)
- ‘New tax will change fund broker charges’ (telegraph.co.uk)
- Fund Managers: Really, Really Bad at What They Do (dailyfinance.com)
- Five ways to cut the cost of investing (telegraph.co.uk)