So, you’ve decided to take the plunge and start investing. Great! But while you might have a rough idea of what you want to start investing in, it’s just as important to understand how you’re going to invest your hard-earned cash.
This is because there are several ways to do it. For instance, a lot of people hire a financial adviser to invest on their behalf as part of an overall lifetime planning exercise. Others cut out the middleperson and buy into investment funds directly, putting their money into the hands of a professional fund manager to make the big calls. And some – called DIY investors – like to be even more direct and invest themselves, deciding on each investment and managing their own portfolios.
Whatever the route, it’s important to take costs into account. DIY investing can mean lower fees as the investor isn’t paying for the services of a financial adviser or fund manager. According to Which?, the average cost of financial advice can be 1% to 3% annually levied on the amount invested, with some advisers instead charging an hourly rate of between £50 and £250.
With fund managers, these costs can stack up, too. Consultancy LangCat revealed an average charge of 0.97% (comprising average costs of 0.77% and transaction charges of 0.20%) being levied on investments a year.
Investors going it alone and trading their own securities avoid these annual fees, but that is not the whole story. Nothing comes entirely for free and DIY investors need to be aware of just some of the fees that can form the overall price of using a platform, depending on which they choose:
- Commission – The service charged by some platforms for handling purchases and sales of securities for a client (for a lot of platforms, this is the main way they make money to cover their overheads).
- Spread – The difference between the buy (offer) and sell (bid) prices quoted for an asset.
- Custody Fee – Also known as a safekeeping fee, this covers a service when the trading firm holds securities on the behalf of the client.
- Conversion Fee – Charged whenever a transaction requires a currency conversion.
- Stamp Duty – This is essentially a tax by the government, incurred by buyers and not sellers. Importantly, there are exemptions (for ETFs, newly issued shares of a company etc) and in some cases the broker can decide to pay it on the client’s behalf.
As with any industry, there is a wide range of firms offering DIY investor platforms and each charge different trading costs. It can get confusing, and unless you actually make a investment on each one, it is difficult to get to the bottom of how far the price of investing can vary.
Luckily, stockbroker analytics group Brokerchooser did some number crunching to find out. It executed identical investments simultaneously across eight trading platforms, buying and selling UK and US shares as a British retail client.
The findings were blatant.
A bulk investment of £2,000 of Lloyds shares with Hargreaves Lansdown would involve a total trading cost of 1.72% of £34.40. This includes a commission charge of £11.95. The cost of this investment isn’t much better with other large firms, with AJ Bell Youinvest charging 1.52% or £30.50 (including a £9.95 commission) and Interactive Investor charging 1.32% or £26.50 (including a £7.99 commission).
Unfortunately, these big firms didn’t do much better with non-UK shares. Based on an investment of £2,000 worth of shares in Snap (the US company behind SnapChat), prices were even higher. Here, Hargreaves Lansdown would charge a total trading cost of 3.38% or £67.60, which includes £11.95 in commission, a £20.40 conversion fee and a spread of £1.44. With AJ Bell Youinvest this would involve a total trading cost of 3.18% or £63.70, with a £9.95 in commission, a 10p custody fee, £1.44 spread and £20.40 conversion fee.
However, all is not lost. eToro is able to handle these investments with much lower costs and was proven to be the cheapest with the total trading cost up to 20x cheaper than the incumbents.
With the Lloyds investment, eToro handled this with a total trading cost of 0.06% or £1.30. And the US investment? A total trading cost of 0.14% or £2.90. We can do this by not charging a custody fee, stamp duty or commission.
With investing, we recognise that a lot of factors are out of our members’ control. However, price is something they can actually have a say on, as trading costs can eat into investment gains if unchecked.
At eToro we’ve stripped back costs to offer a much cleaner and competitive trading service, letting investors focus on trading without having to worry about what costs could be lurking below the surface.
Join us and see how much you could save as you invest.
Your capital is at risk.
Zero commission is available to clients of eToro (Europe) Ltd., eToro (UK) Ltd. and eToro AUS Capital Limited (AFSL 491139).
For clients of eToro AUS, only stocks traded on US stock exchanges are available as underlying assets and with no commission. These stocks are offered through eToro Service (ARSN 637 489 466), operated by Gleneagle Asset Management Limited ABN 29 103 162 278, and promoted by eToro AUS Capital Limited CAR 001281634. Refer to our FSG and PDS before deciding whether to trade with us. All other stocks are offered as derivatives and bear commission.
Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee will be charged when opening or closing the position. Other fees may apply. For additional information regarding fees, click here. Your capital is at risk.