Which investing platform is cheapest for you? Which online broker best suits your needs? These are simple-sounding questions, but they twist the antennae of many Monevator readers.
That’s because the online platform / broker market is a swamp of confusion pricing – as one look at our platform comparison table will tell you.
Figuring out which platform is cheapest
Happily, you can work out which platform is cheapest for yourself just by following a few straightforward steps…
Step 1 – Preparation
First jot down the key factors that affect your calculation:
- The size of your portfolio.
- The account types you want – SIPP, ISA, or general investment account (GIA).
- The products you want – Funds, ETFs, investment trusts, shares, bonds, and so on.
- How often you will buy and sell – You may not know for sure, so estimate this based on past patterns or future intentions.
Note that the number of products you own doesn’t matter. No platform will charge you more for owning nine ETFs versus five, for example. (Keep in mind though that a few brokers charge switching fees based on your number of holdings. This only becomes relevant if you decide to move your business).
Next tot up all the charges you’d incur with the most competitive of the flat-fee platforms. (See our flat-fee broker comparison table near the top of our platform comparison page.)
Make sure you count any annual platform fees, trading costs, and other relevant charges listed on the Monevator table or the platform’s own price schedule. Remember to add the cost of multiple accounts if you hold them.
You now have a base cost for the investing services you require.
From here we can compare that cost against the best of the percentage fee platforms. The winner will be the cheapest deal for you.
Percentage fee platforms are generally best for people with small portfolios, whereas competitive flat-fee platforms are typically better for portfolios larger than £20,000 in ISAs.
Note: The problem with percentage-fee platforms is that as your portfolio swells, the costs may keep rising, too. In an extreme case – say a £1 million portfolio that’s all invested in funds – this cost vampire could be sucking out more than £3,000 a year versus as little as £200 for the same portfolio held with a flat-fee platform. So be aware that which platform is cheapest for you could change over time.
Step 2 – The money shot
To compare flat-fee Platform A with percentage-fee Platform B, make the following calculation:
Total annual costs of platform A divided by platform B percentage rate
= breakeven point
For example, if your fixed rate costs at Platform A = £80 and you’re comparing with a 0.25% rate at Platform B:
£80 / 0.0025 = £32,000
The breakeven point – £32,000 in this example – refers to your portfolio’s size. At this point, your costs will be the same with either platform.
In the example above, we’re better off with platform A if our portfolio is worth more than £32,000. Any less and we should bunk up with platform B.
A few things to remember:
- Subtract any additional fixed rate costs charged by Platform B from Platform A’s fixed costs before making the calculation, so you’re comparing fairly.
- Check if cheaper regular investment trades are available for the products you want.
- Add in your portfolio’s Ongoing Charge Figure (OCF) to compare platform choices that don’t stock exactly the same products, or that offer discounts on certain fund manager’s charges.
- Watch out for caps on percentage fees that can make a broker more competitive in certain scenarios. For example, AJ Bell, Fidelity, and Hargreaves Lansdown set a ceiling on the fees you’ll pay for ETFs, shares, investment trusts, and bonds.
Step 3 – What about zero commission brokers?
Some platforms have abolished the main sources of brokerage income: platform fees and trading fees. For this act of largesse they’ve earned the moniker zero commission brokers. Sounds like a great deal!
But hang on, how do they pay for their salaries, app development, servers, shiny offices… and make a profit?
Zero commission brokers are not a scam, but they do need to earn money, so don’t be fooled into thinking they’re free.
We wrote a piece on zero commission brokers delving into their various revenue sources such as spreads, premium services, currency conversion fees, interest rate arbitrage and so on. Have a read and then you can make a more informed decision if you’re considering this route.
Ultimately, zero commission brokers are like any freemium service. You’re spared the pain of forking out upfront fees, but they must recoup the cost of your custom in other ways, some of which may not be obvious.
It’s worth repeating that zero commission brokers are not intrinsically dodgy. Some of them have been operating successfully for over a decade.
But it’s a good idea to understand how they make money. Then you can pick the one that isn’t poised to profit excessively from your investing behaviour.
Step 4 – What happens next
If your choice of broker hinges on your portfolio’s size then consider how quickly your assets are growing or shrinking when deciding which platform is cheapest.
Are you piling cash into the pot? Or selling out faster than an old rocker being offered a knighthood?
If you’re likely to smash through the breakeven point within a year or two, it may be worth going with the platform that will suit you in the foreseeable future.
Also watch out for switching fever – the unbearable pressure to take action just because your platform is a smidge less than optimal.
In our example above, the difference in fees would only be £20 per year if the portfolio grew to £40,000 in size. Switching hassle can make bolting for the door an exercise in self-harm every time your platform falls off the Best Buy spot.
Pay attention to entry and exit charges when you switch brokers – see our table. Some readers have reported success in demanding their platform waives its exit charges.
Also beware that switching brokers can be a (too) lengthy process, and it may leave you out of the market for some time if you’re forced to cash out of your positions before switching.
See our guides on transferring an ISA and on transferring a pension for more.
Protect your portfolio – Remember there are limits to compensation should the worst happen to your broker. You might therefore decide to use two or more brokers to spread your risk. See the Financial Services Compensation Scheme for more information.
Some canny Monevator readers time their switching to take advantage of temporary cash back offers.
We wouldn’t suggest you let such antics risk derailing a once-a-decade push to sort out your finances. But if you’re on top of this stuff – the sort who checks the comments on the Monevator broker table before you open your email – then it could be a way to pick up some free loot en route.
Take it steady,
The Accumulator
