The analysis – an overview
In our last review we considered the new proposition from Hargreaves Lansdown; they are possibly the most well-known direct proposition in the market however they are not the only one. In 1995 Interactive Investor was created. They describe themselves as a trading platform for investors.
It is best to see their proposition as a kit car, they provide the investor with the tools to build their own portfolio but they will not steer the investor in any direction with regards to the final design.
What Interactive Investor did in 2012 was move to an unbundled structure ahead of others in the market, and although they were applauded by the media (Financial Times) they were met with criticism by some other direct propositions.
In this review we will unpick the proposition and highlight where it is positioned.
Bundled v unbundled – what does this mean?
A bundled fund has one annual charge, e.g. 1.5% p.a. It is collected by a fund manager but then this is split so part of the payment goes to Interactive Investor and part is retained by the investment house (fund manager).
In 2012 Interactive Investor moved to an unbundled structure so that the rebate payment that they were receiving was paid directly to the end investor. The quid pro quo was that they introduced a flat fee charging structure.
This put them in direct contrast to the market, which continued to offer what was perceived as a ‘free’ service.
What are the charges?
The charges are very clear for an ISA and Investment Account. There is a flat fee of £20 per quarter.
To compare, Hargreaves Lansdown charges 0.45% p.a. so this means that on a fund of £20,000 Hargreaves Lansdown is charging £90 p.a. (slightly more expensive). As the value increases so does their charge. (Interactive Investor stays at £80 p.a.)
However the are some additional points to consider which make the comparison slightly harder to understand:
- Whereas Hargreaves Lansdown charges per account per client, Interactive Investor combines the charge for spouses and accounts. So for example, if a husband and wife have four accounts then the total charge is £20 per quarter for all accounts
- Interactive Investor makes a charge for selling / buying shares and funds, whereas Hargreaves Lansdown only charges for shares. This means if an investor only holds funds Hargreaves Lansdown may be cheaper
- For regular investors Interactive Investor charges £1.50 per trade. The £20 quarterly charge is held as a credit on the account and the trading charges for that quarter are offset against this
- Any rebates for funds are paid back to the clients account
This is best described as follows:
- Husband and wife have an ISA of £10,000 each and pay regular contributions of £100.00 per month into four funds each
- The total charge is £20 per quarter, and they nominate the charge to come from the wife’s account. This is an equivalent charge of 0.4%
- Each month the husband is charged £6.00 for each trade he makes, in total this comes to around £72 per year
- Each month the wife is charged £6 for each trade she makes but this is offset against the £20 charge that is paid on the account. In effect this negates the trading charge
- This means in effect the total charge is around £152 a year compared to Hargreaves which would be £90. This means the breakeven point is around £35,000 of joint assets
Obviously this is an example but explains that care needs to be taken when comparing the charges, especially when trading more and using funds and shares.
Is there anything else you should know?
Interactive Investor charge £144 (including VAT) per client for a SIPP. However, the £20 quarterly fee for the ISA and personal account is waived.
Any trading charges are in addition to this.
Similar to Hargreaves Lansdown there must be sufficient cash to cover the quarterly charge of £20 (or £36 for the SIPP). Unlike Hargreaves Lansdown they will take this from the cash from regular payments on the account, and if not then from a debit card held on account. If there are insufficient funds to cover the charges then they will charge £25 which is significantly higher than Hargreaves.
Can you move?
Yes but if an investor wants to keep their existing holdings (i.e. without selling them), Interactive Investor charges £15 per line of stock per account to transfer assets to a new provider for an ISA and Investment Account. If an investor has ten holdings they will have a charge of £150.
For a pension the charge to move away is £120 (including VAT)
Does Interactive Investor offer good value?
For ISA and Investment Accounts with no regular investments and a value circa £20,000, Interactive Investor does appear to offer better value than Hargreaves Lansdown. If regular contributions are added into the mix then the breakeven point becomes much higher for Interactive Investor to be more cost effective.
Where a pension is added into the mix; for a single person not paying contributions the breakeven point is around £30,000 to £35,000. For a couple it is around £60,000. For those paying regular contributions it becomes more complex.
When using funds Interactive Investor fully rebates back any payment they receive and this could be around 0.64% (this is likely to be less than Hargreaves Lansdown who has greater buying power).
If we consider Interactive Investor purely as a place to trade i.e. the kit car analogy, then at some points the proposition is cheaper and certainly for investors with larger sums to invest (£100,000 plus) it offers better value. What you don’t get with Interactive Investor are the bells and whistles you receive from Hargreaves Lansdown. Investors would need to consider whether the potential savings they make, compensate for the loss of benefits offered by Hargreaves Lansdown.
So where now
The ‘new’ Interactive Investor proposition has been in place for a couple of years and the platform has won a number of awards; certainly from an industry perspective it seems to have made the right moves. An investor will need to weigh up the cost against other platforms and decide what offers the best value to them, for what they want to do.
The investor needs to decide whether they want a kit car approach, where they are left to build the proposition at a fairly clear low cost base or whether they want a ready-made car which is likely to cost more. Interactive Investor believes there are sufficient savvy investors to go for the kit car version, and clearly being in the market since 1995 means they have a loyal following.
Our guess is that the majority will be comfortable with Hargreaves Lansdown as a respected brand offering a reasonable solution. Some Hargreaves Lansdown clients will undoubtedly pay significantly more when compared to the Interactive Investor model, but the problem persists in Financial Services; and that is that attempts to simplify choices for investors usually results in a plethora of new issues and choices for them to grapple with.