Mark Polson is the founder of Lang Cat, a consultancy and communications company based in Leith in Edinburgh. Lang Cat produces a free, annually updated guide to investment platforms called "Come and Have a Go" which you can find on their website. You do need to register but they don't bombard you with irrelevant email afterwards. The report interlaces lots of colourful and clear price comparison charts with amusing cartoons of cats (like the one behind Mark below) and Lang Cat's trademark sense of humour.
What is an Investment Platform?
So first thing to say is a platform is just an online service that lets you buy investments. So if you go on to the most famous one for direct investors, which is Hargreaves Lansdown, but there's lots of others like Interactive Investor or AJ Bell or loads of other guys you can use and what they do is they take your money, they take your instructions to buy whatever investments it is you want. That might be a fund or share or a cash product or whatever it is that you want to buy, and then they hold it for you.
I like to say platforms really do four things:
- They let you buy stuff
- They let you hold it.
- They tell you about it give you information on how it's doing and all that stuff.
- Then when you're bored of it they'll sell it for you again and then we just go around and around
What's clever about platforms is they generally offer you thousands upon thousands of things you can buy and so if for example you have a very strong desire to buy Guatemalan yak futures or a Colombian select pharmaceutical arrangement or whatever and you find it there's a good chance you'll find a platform that will do that for you.
Whereas if you've popped into your bank and said "Hi, can I have this please?" they'd just look at you as if you'd come from a different planet.
The fees that you pay cover you for buying investments. Some of them have trading fees as well so for mainstream stuff most of them will cover you for buying your fund. Let's say they'll hold that for you, they might hold it for you inside an ISA, an Individual Savings Account if you want one. Or they might do it for you inside a pension if you want to have it inside a pension.
They'll keep it safe for you so it will be ring-fenced away from their own money so that there's no, you know, Rupert Murdoch nonsense going on.
So if they go bust your money is protected?
If they go bust your money is protected yeah that's really important so that they're they're all heavily, heavily regulated in what they do. They don't give you advice for the most part they won't tell you what to do but a lot of them will put considerable time and effort into suggesting things that you might buy. There's a catch with some of that sometimes. And really it becomes a sort of bucket into which you place investments and that's quite a nice easy way to do it.
Along the way some of them have tried to make themselves very simple and easy to use which we applaud. Some of them to have made themselves really, really complicated and very sophisticated which is cool if you're a pointy head and you're into that stuff. If you're the kinda guy with four screens, you know, with Bloomberg feeds and all that kind of stuff there are platforms for that as well and the trick probably if you're you know if you're someone watching this and thinking about where might you invest its trying to work out what kind of person you are and that should drive the kind of choice that you would make.
What's the rough cost of a platform?
Well it varies depending on how much you have to invest so there are some platforms and I mentioned one already, Interactive Investor another one is called the Share Centre, another one is called Alliance Trust Savings based up in Dundee. I don't know why I felt the need to mention it, probably because it's in Scotland and there aren't many other things to do with financial services in Dundee. But that's enough Dundee. They charge a flat fee so it'll cost you between £100 and £150 usually to do the thing that you're doing, a little bit less maybe, and you'll get some trading allowed inside that as well.
Now that works brilliantly if you've got a bit more money but if you're starting out, let's say, or you've got just five or ten grand to put away or something like that then paying £100 or £150 that's quite a lot there are plenty of other places that will do it on a percentage basis. You would expect to pay anything from 0.25%, a quarter of one percent, up to about 0.45%.
So if I've got ten thousand pounds and I'm paying point two five percent that's twenty five pounds every year?
Twenty five up to forty five quid a year, not a massive difference. Now at ten grand that difference isn't huge, it's a round in a pub. If you're lucky enough to have a hundred grand, guess what? Arithmetic says it's £450 versus £250. Now it's a couple of good meals out.
If you're really lucky and you've got a big pension that you've transferred in, maybe a SIPP of a million pounds or something like that I'm not even gonna try and do those sums in my head. So it can make quite a big difference on that basis.
Generally speaking it's good practice to keep costs as low as you can but it's no means the case that the cheapest platform will always be the most suitable. The kind of guiding rule, and this goes for life, right, not just finance:
Something that is cheap and unsuitable is still unsuitable and something that is expensive and unsuitable is still unsuitable.
Now some funds also charge you to put your money into the fund, so you've got an entry fee, and they charge you an exit fee if you take your money out. How do you feel about that?
It depends on the platform so a lot of them don't charge you on the way in. There are a couple that will charge you trading fees for for daring to put some money into a new investment and that's okay I guess. You know they're trying to, when platforms do that they're being sort of socialist right? They're saying if you use the service then you pay for the service. They're all pretty red in tooth and claw these guys, they do know how to turn a profit but their activity based costing is sort of all right.
What I think is unconscionable is fees on the way out. If you need to move your money somewhere else because that platform is no longer suitable for you whatever else I think it's terrible if the platform takes a slice of you on the way out. Not all of them do.
So for example Hargreaves Lansdown does take a slice on the way out but Fidelity Personal Investing another very big shot doesn't, you're free to go at any time. We've tried to put pressure on some of the guys who have exit fees. Some people have responded a little bit and they have come down over time. Not just us; lots of people have done that. Some of them, especially very large ones based out of Bristol, which if you'd not in the industry that's Hargreaves Lansdown by the way (that was horrible joke, that's what passes for jokes in what we do). Well, they basically just told us to go and do one and they've still got their exit fees in place.
The worst offenders for this stuff aren't the platforms. The worst offenders are the the big kind of adviser organizations. We get into guys like St James's Place and people like that where they have very, very big exit fees and that's a world of hurt over there. I don't think it's our subject today but that you know those guys really, really do you know gouge you on the way out.
But you have a manager which has a double-barrelled name so it's okay to charge you a lot?
It's outstanding right? And a really nice wristwatch, and he plays golf and it must be nice for him to be that affluent so I feel great for him.
The best excuse I've heard from somebody, one of my clients, was "don't worry about this 3% charge because the daily volatility on your stocks could be 3%..."
That is an outstanding argument and the fact that the three percent could be negative so it's six percent that he's just had out of you is neither here nor there.
From one of these organizations and, I won't say who it was, I saw a quote, an illustration, which they have to give you if you're going to invest. Tucked away on page like 468, hidden in invisible ink somewhere (you know that's not true it was actually easy to see if you know what you're looking for) they had a figure called a "reduction in yield" which is gobbledygook. But what it means is they show you a growth or a set growth rate of what the investment is expected to do and it's bollocks right? That's the one figure it will never produce, but nobody knows the future so, okay, you've got to pick something and they picked 4.6%.
And then they showed what the effect would be in terms of the costs they took and their costs each year were 2.5%. What I'm doing is I'm doing taking away in my head and four point six minus two point five is two point one, I'm pretty sure, so they get more than you do! Awesome right? We're all in the wrong game
We ate half your lunch is that okay?
That's pretty nice yeah that's right. I mean you got a kind of "well-played fellow"... You'd be nuts to accept a structure where they are guaranteed to do better than you are. That seems crazy to me.