The Financial Expert stockbroker excellence series of blog posts is all about comparing UK stockbrokers and discovering how the features, costs and rules of investment platforms vary between UK firms.
In short: they vary a lot. So it’s important to understand these nuances and become adept at separating the very best investing apps from the rest.
In this blog post we’re looking at the deposit & investment feature known generally as ‘regular investments’.
What is a regular investment scheme in a broker account?
A regular investment scheme has two key steps:
- A direct debit transfer is made each month to automatically transfer cash from your bank account into your Stocks & Shares ISA (see comparison) or standard investment account.
- The new cash is used to automatically buy pre-selected investments.
What’s the advantage of a regular investment scheme? The answer is reducing investing costs.
While a broker might charge share dealing commission at a flat rate per trade, this is heavily discounted for a regular investment.
This is because the broker usually executes a regular investment at a time which is convenient and economical for them. This might be at a single trading point in the day, or a week. By waiting before they place a trade, they are able to batch together hundreds or thousands of investor trades into a single transaction on the stock market, reducing their own dealing costs significantly. This economy of scale is passed back to the client in the form of a discounted regular investment charge.
Regular investment charges are essential when investing small amounts on a regular basis.
The impact of regular investment discounts
Without a regular investment plan: If £150 is invested in 5 company shares per month, this would result in share dealing charges of 5 x the standard share dealing fee. If the share dealing fee was £6.95 then this would result in £34.75 of charges per month. This would eat up a large fraction of the contribution each month.
Alternatively, a regular investment plan might charge just £1.50 per trade. This would equate to £7.50 per month, which feels far more reasonable.
Using normal trades, the investor would lose 23.2% of their investments to fees each month, but with a discounted regular plan, they’re only paying 5% in fees. The less of an initial fee is paid, the more cash can be placed into the assets themselves.
Dividend regular reinvestment
A separate type of regular investment scheme is known as automatic dividend reinvestment. This is where stockbrokers will use any dividend income to buy more shares in the company which made the distribution.
This is a very useful function which allows share portfolio investors to really leverage the full power of compounding. We’ll explain why below.
Reinvesting dividends using normal trades is often a fruitless exercise. On a £1,000 holding of shares, you might expect to receive quarterly or annual dividends of between £10 – £40. Some dividend growth investors target companies which reliably pay even higher dividends than this.
Such holdings result in a trickle of £10 here, £5 there into the cash balance within your UK stockbroker account. Under normal conditions, it will remain here until you actively use it to buy further investments.
In an ideal world, you would reinvest dividends immediately to ensure that your income begins producing its own income – causing the compound interest effect to work at its full potential.
However, investing costs can severely hinder investors who attempt to do this manually. Flat share dealing fees are rearing their ugly head once again. On a dividend receipt of £5, an investor cannot make a share trade if the minimum dealing charge is £5. Therefore, they are forced to wait until the cumulative dividends have built up to a large enough sum which is economical to invest.
That is, until automatic dividend reinvestment features began.
This feature promises clients that the broker will automatically reinvest any dividends received. The trade may take several weeks to execute (to reduce costs for the broker), but it’ll be cheap. Really cheap.
Which UK stockbrokers offer discounted dividend reinvestment?
Barclays Smart Investor charges no additional fees for dividend reinvestment (source). As the Barclays Smart Investor website states; “We’ve included a number of activities in our customer fee, such as reinvesting dividends and transferring investments.” This means that it’s theoretically included in the standard administration fee paid by all investors.
Fidelity Investments charges £1.50 to automatically reinvest the dividends from an investment (source).
Interactive Investor charges £0.99 to automatically reinvest dividends. However this service only applies to a list of qualifying companies, and the dividend must be £10 or higher (source).
Hargreaves Lansdown charges a dividend reinvestment fee as follows: “We will reinvest any income automatically for you between the 11th and 21st of the month when it reaches £10 (or your chosen minimum) per holding. If you’d like any share income automatically reinvested, we charge 1% of the trade value (minimum £1, maximum of £10)” (source).