It’s not just what you pay to invest, it’s how you pay

• Selling down investments to pay platform fees has a negative compounding effect, amounting to as much as £4,666 over a 10-year period (based on a £500,000 portfolio), analysis finds.
• Investors are urged to take a few minutes to set-up a direct debit with their platform providers. They’ll be glad they did in the years to come.

With the financial spring-cleaning season upon us ahead of the new tax year, interactive investor, the UK’s second-largest platform, has analysed data demonstrating the bigger impact platform fees can have on customers’ investments over time when taken directly from investment portfolios rather than paid in cash.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

When fees are taken directly from the investment portfolio, it creates a drag on performance that compounds over time.

This drag on investment performance amounts to £4,666 over 10 years, based on a percentage-based platform fee of 0.3% on a £500,000 portfolio, additional yearly contributions totalling £10,000 (spread evenly over the months) and annual investment growth of 5%.

This is compared to the platform fee being covered by cash held outside investment portfolio, such as via direct debit from a bank account or cash held on the investment platform.

With a more modest portfolio starting point, the difference in portfolio size is still stark. Based on a £250,000 starting point and using the same assumptions, the difference would be £2,460 over 10 years

Even if the starting portfolio is reduced further to £100,000 and annual contributions pared back to £5,000 (again spread evenly over the months), there is still a significant £1,024 difference in the size of the portfolio when selling down investments to pay fees versus paying separately from cash.

Clearly, platform investors who don’t already do so, should take a few minutes to set-up a direct debit with their provider. They will be much better off over time for having done so.

Customers on interactive investor’s Investor Essentials and Pension Essential plans (for assets up to £50,000) are required to pay their monthly platform fee via direct debit, from their bank account.

Customers on other ii service plans are encouraged to fund the platform charge via direct debit from their bank account or through available cash held on the platform.  If there isn’t enough available cash to pay the platform fee, ii contacts the customer to pay the outstanding amount.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Allowing investments to be sold from your portfolio to cover the platform fee – in most cases charged as a percentage of assets that penalises wealth generation rather than as a simple flat-flee - amounts to a double whammy on investment portfolios, forcing investors to wait longer to reach financial goals.

“Most of us are comfortable with paying household bills by monthly direct debit from a bank account, so why not do the same to cover investment platform fees? Direct debit offers a convenient and automated way to pay fees and removes the risk of selling investments at a disadvantageous time.

“The opportunity cost of using cash held outside a portfolio to fund platform fees is the potential return that could have been earned if the cash was invested in the portfolio. In comparison, taking fees from a current account is unlikely to sacrifice interest income. This method would put platform fees firmly in the mix of spending considerations, as it would appear on bank statements in pounds and pence terms.

“For customers of a percentage fee-based investment platform, this could come as a shock, because the platform fee grows when their investments do under this structure. They could benefit from interactive investor’s flat fee, which keeps the platform charge the same even as the value of a portfolio increases – helping customers reach their financial goals quicker. Setting up a direct debit would also dispel the perception held among many investors that their investing is free.

“It is crucial investors know how they’re paying their fees, the amount they’re paying and how these factors affect their investment returns. These numbers really add up over time.”

Notes to editors:

*The calculations made are purely hypothetical and do not try to replicate any particular platform. Instead, they seek to resemble the average platform and a typical customer profile.