Our stockbroker excellence articles are a series of short blog posts which each focus on a different factor that makes the best UK stockbrokers the very best. Read on to learn more about the different types of fees and charges that UK stockbrokers apply to client accounts. We will explain the vast differences between the pricing plans used by different firms, and the impact this can have upon your portfolio.
After completing the full range of ‘stockbroker excellence’ articles, you’ll be able to fully analyse and compare the best UK stockbrokers yourself, and become a savvy broker guide to others!
Or you can let us crunch the numbers and do the comparing all for you. We’ve selected and filtered the top UK stockbrokers on our stockbroker comparison page. We’ve also compared the excellent range of UK investing apps available.
If you’re interested in just seeing a selection of the best brokers for UK investors, then head to those guides now. Otherwise, I hope you enjoy this informative article.
What are the main charges made by UK stockbrokers
Stockbrokers generate revenues through a myriad of charges and fees. Reading the ‘fees & charges’ section of any UK stockbroker often feels similar to browsing a menu. You’ll find that most fees fall under the following categories:
- Platform fees, also known as account fees or administration fees
- Trading commissions, also known as trading fees or dealing charges
- Fund entry fees, also known as ‘front load’
- Foreign exchange conversion fees
- Exit fees, transfer fees & account closure charges
- Inactivity fees
Which charges add up and which become insignificant?
Brokers use such a long list of fees to ensure that they collect a minimum amount of revenue from very different investor behaviour profiles.
Active traders will be hit by trading fees on a frequent basis, as these are charged on each ‘buy’ or ‘sell’ trade made through the brokerage account.
Inactive traders will still pay fees through a platform or account charge which is collected even if the investor doesn’t actively use their account to enter into new transactions.
Investors who choose to buy expensive collective investment schemes such as Venture Capital Trusts (UK-only) may incur entry fees, which are charged at the point of investment into the fund.
How your total fees will be carved up will also be impacted by your portfolio size. Brokers usually offer preferential rates or capped fees for large investment portfolios (e.g. over £250,000) which will cause those fees to diminish in size relative to the overall account value. Any fee charged at a flat rate will also naturally shrink in size in proportion to account value.
To understand which charges will add-up, you’ll need to paint a picture of your behaviour as an investor, and think about whether the size of your own portfolio will entitle you to discounts.
The two main platform fee pricing structures
UK stockbrokers tend to pick one of two distinct pricing structures for account fees:
- Percentage of assets
- Flat or tiered fees
Percentage of assets basis
A percentage of assets broker may charge a percentage of your account value as an annual charge. This could range from 0.2% or 0.5% of your account value. In some cases, this fees covers more than just the basic administration of your account. Brokers with portfolio management services use this fee to cover the active management of the investments in your account.
For example, at the time of writing:
- Vanguard Investor currently charges 0.15% of account value (capped at £375) as an annual account charge.
- Fidelity International charges investors between 0.2% and 0.35% depending on the size of your account, with larger accounts attracting the lower fee.
- Hargreaves Lansdown charges 0% on shares, and 0.45% on funds held (although this charge reduces for higher fund values).
Flat or tiered account charges
A flat fee is as simple as it sounds. These brokers charge even customer a single account charge each year, regardless of account size or trading activity.
For example:
- Interactive Investor charges an account fee of £9.99 per month (equivalent to £119.88 per year).
Which platform fee basis is best for you?
The only way to work out which fee structure is advantageous is by running the numbers yourself using your expected account value. If you plan to grow your account over the medium term, we recommend using a higher figure than your starting size, as you’ll want to pick a broker that will remain the best pick for several years and not just right now based on your temporary circumstances.
Avoiding the shock at the end of your partnership: reading the small print on other fees
Earlier, we described the list of fees and charges as a ‘menu’, due to its length. Although some of the fees included on fee webpages may sound obscures, it’s important to be aware of all of them.
A fee often overlooked by investors is the exit or transfer out charge. Some brokers charge a penalty to transfer your investments to another broker when you decide to move your account. In many cases, these transfer fees are similar to dealing charges, making it just as cheap to sell your portfolio rather than transfer.
Yet, if you shop around you may be able to find a broker which doesn’t charge for this service. If you’re planning to build a portfolio of 20+ individual shares then this could be worth £100s to your at the point of transferring.
Foreign exchange fees: will they apply to you?
Many investors make the mistake of assuming that foreign exchange fees won’t apply to their investments. It is worth considering this carefully before reaching this conclusion.
Many funds offered by UK stockbrokers are actually denominated in a foreign currency. This is usually because the funds is either listed or regulated in another country, such as the US or Ireland.
Buying the shares or units of a foreign fund will require a foreign currency conversion. Securities denominated in a foreign currency will usually pay dividends in that currency as well, so you may find you need to convert those monies back into Pound Sterling to reinvest them elsewhere. Finally, when you dispose of foreign assets you’ll need to convert the proceeds back into Pound Sterling if you want to invest the money in GBP funds & shares going forwards.
It’s possible in some cases that you can use a separate forex broker to convert large cash sums from one currency to another, outside of your stockbroker account. However this may not always be cost-effective, and adds to the hassle of conducting trades.
Don’t forget about invisible fees deducted within your investments
Stockbrokers have a responsibility to explain the fees and charges of their services, but it’s easy to forget that the asset managers of collective investment vehicles also take a charge for providing services. These can be a larger investing cost than the broker fees themselves.
You won’t see that charge being applied, because it is taken by the asset manager from the assets of the scheme itself, so it will be theoretically reflected in a lower investment valuation.
Actively managed funds are known to charge up to 1.5% per year, particularly if they invest in difficult-to-research asset classes such as emerging markets, private equity and property.
Cheap equity exchange traded funds on the other hand might charge as little as 0.1% per year.
Look for information about the ‘Ongoing Charge (OCF), Total Expense Ratio (TER) or Annual management charge in the fund factsheet which you’ll find on the website of any fund manager. These terms all refer to slightly different definitions of costs so try to look for the same metric for maximum comparability between rival funds.