September 25, 2022

Finance & Economy

Let's Talk About Investment

Living costs add to pressure on investment platform charges

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The cost of living crisis threatens to upset the “uneasy truce” between DIY investment platforms over fees and charges, as customers set aside less for saving and hunt for bargains.

AJ Bell, one of the largest UK platforms, last week launched a round of cuts to annual charges, foreign exchange and exit fees. The company said it expected the move to save its customers £5mn overall a year.

Pressure on fees comes as savers invest less as household budgets feel the strain of rising inflation and energy prices. New investment start-ups have already challenged incumbent platforms on price, but the biggest brokers are now responding after a spell of stable charges.

“There’s been an almost uneasy truce among traditional platform providers, who have not cut fees for a while,” said Holly Mackay, chief executive of consultancy Boring Money.

Alongside the fee cuts on its main DIY platform, AJ Bell has also launched a simplified investing app, called Dodl, which will charge no trading fees, putting it toe-to-toe with investment and trading start-ups.

“The increase in the cost of living is absolutely driving a reappraisal of broker value,” said Andrew Dengate, UK head of marketing at Australian-based broker Stake, which was launched in Britain in 2020. He said customers were increasingly using different platforms to reduce their trading costs, while keeping their traditional platform account.

The advent of low-cost brokers in the US in recent years prompted platforms across the industry to slash fees in a race to offer zero-commission trading. However, the UK market is different, notably because brokers cannot fund their operations by taking payment from market makers in exchange for carrying out trades.

“We’re not trying to create a price war,” said Andy Bell, chief executive of the Manchester-based group. “At a time when cost of living is going up, our costs are going down.” 

Bell said the cost of living crisis would be less acute for the platform’s clients, who tended to be wealthier than the average. “Our customer base is not a cross-section of society. A lot of them will be immunised from it,” he said. Still, he said, “there are going to be some tough times ahead for large swaths of society”. 

The cuts to AJ Bell’s fees in some cases will hand more benefits to wealthier clients. For instance, the annual charge for customers with less than £250,000 on the platform are unchanged, while clients with more than £500,000 will see their fee fall to zero.

Interactive Investor, a rival platform, has also cited the cost of living as it launched a set of promotions, offering as much as £2,000 in cash back to customers who transfer savings products to the platform. Moira O’Neill, head of personal finance, said the deals “come at a time when many savers will be counting every single pound and penny”. 

Hargreaves Lansdown, the largest platform, has continued to build its market share and retain customers despite being among the more expensive options on the market.

Research by Boring Money showed price was not the most important factor for customers picking an investment platform. Would-be clients look at service and ease of use, along with customer recommendations, ahead of price. People also prefer clear and simple charges, such as a single fixed rate, over more complex percentage-based fees, even if paying by percentage is cheaper.

“Although people do not chase rock bottom they still want something competitive,” said Mackay. “With every announcement on a cost reduction from a competitor, Hargreaves Lansdown looks relatively more expensive and I wonder how long they can keep the cost reduction ear plugs in.”

For platforms feeling pressure to lower their upfront fees to customers, rising interest rates will provide an alternative source of revenue. As the Bank of England moves to tame inflation by raising interest rates, platforms will regain a source of income that they have largely lacked during the era of near-zero interest rates. Retaining some of the interest earned on clients’ cash can provide substantial income.

The attention on platform costs comes as fees have been under scrutiny from UK regulators. A recent study by the Financial Conduct Authority found that a quarter of clients said it was difficult to compare costs across different platforms.

The regulator highlighted examples of “poor practices” that it said “could lead to confusion and a lack of confidence for consumers, making comparisons on price information”, such as spreading out fee information across different web pages or “information being ‘hidden away’ in legalistically worded terms and conditions”. 

Although he thought his own platform measured up well, Bell said the FCA statement was a “nudge” to the industry to be more clear. “I sympathise with the FCA’s position. If you want to go buy a bag of carrots from a supermarket, you can compare like with like. It’s quite difficult to do that with platforms,” he said.

https://www.ft.com/content/c469a85a-f52d-4459-ae5d-bbd688b664bc