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How To Do It Yourself
– September 01, 2009 13:16 PM
Page 1 of 2
So you’ve done your homework into the markets you like, the indices you prefer and the exchange-traded funds you want to track them. But how do you actually go about putting together your portfolio?
The passive, index-tracking nature of ETFs means that you can build a trading or long-term savings portfolio for a very attractive all-in management fee. But there are other costs involved in putting together an ETF portfolio, notably stockbrokers’ charges. And there is a range of ways of executing your transactions, from the passive approach implied by a regular savings plan, to timing the market yourself on an intraday basis, to using the various forms of limit and stop orders. Before taking the plunge, any investor should get a few key questions answered. What exactly are these different investment routes? What are the best stockbroker rates going? And are there any hidden pitfalls that investors should be aware of?
IndexUniverse.eu surveyed five leading UK online stockbrokers – TD Waterhouse, Halifax Share Dealing, Barclays Stockbrokers, Selftrade and the Share Centre – and asked them about fees and the different ways of executing transactions. In this article we share our findings.
One caveat – this piece is aimed at investors who wish to follow the lowest-cost, do-it-yourself route when putting together a portfolio. If you wish to use an independent financial advisor (IFA) in managing your investments, a lot of the detail below will not be relevant as the IFA will usually execute trades for you. If you follow the IFA route, you will of course have to pay a professional fee, plus the cost of the “platform” used for trade execution, administration and reporting. A typical IFA platform charges around 0.3-0.4% per annum of the total funds invested, perhaps less for larger sums.
Three points are worth making when looking for a like-for-like comparison between accounts.
First, how much you will actually pay in fees to your stockbroker depends a great deal on the type of client you are. Brokers earn more money the more you trade, so their transaction fee scales are often designed to incentivise you to turn over your portfolio frequently. Trading heavily is almost certainly not in your best interest, but it’s up to you. Choose the type of account that should minimise your fees, bearing in mind the amount of trading you plan to do.
Second, most of the brokerage accounts we surveyed impose extra fees for infrequent trading. Be sure to factor these into your account comparison.
Third, if you’re a UK resident it makes a great deal of sense to buy your ETFs within a tax-advantaged structure such as an ISA (individual savings account) or SIPP (self-invested pension plan). Remember, however, that these routes will mean extra administration charges. SIPPs in particular are often run by entities separate from the stockbroker and SIPP providers will levy their own fees, so be sure to check what they are.
Here’s our table of findings from the five brokers we surveyed.
A couple of things stand out from the table. First, online dealing is much cheaper than telephone dealing. Second, buying through a regular savings plan offers some very cheap rates, so this route makes a great deal of sense if you’re buying ETFs within an ISA, for example.
Some additional potential charges are worth noting. If you want to hold your ETFs in paper (certificated) format, you can usually get your broker to do this for you but there will be an associated cost. And if you want to transfer ETF holdings from an account with one broker to an account with another there will usually be a charge of £15-25 per line of stock.
For SIPPs, there may be set-up charges, charges for transferring in other pension plans, for transferring the SIPP to another firm, and for withdrawing income once you get to pensionable age, so remember to check these as well before deciding on a provider.
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