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The beginner's guide to fund supermarkets
Using fund supermarkets to buy investments for your ISA and pension was meant to be easy but a price war has muddied the waters.
by Gavin Lumsden on Jan 29, 2014 at 15:07
'Fund supermarkets' are businesses that sell you funds cheaper than if you bought them from fund managers direct.
The financial regulator has ordered these companies to change their charges. For the first time investors pay directly for the services of their fund supermarket even though, overall, many will now pay less!
This video explains what is happening and why.
The Lolly Investor Programme is a weekly series aimed at beginner investors. You can watch earlier videos in the series here.
Can't watch now? Read my script instead.
We're used to hearing about price wars between the supermarkets, now for the first time the same thing is happening between the companies that sell funds to us.
This month, Hargreaves Lansdown, the country's largest fund supermarket, cut its prices and was soon followed by Fidelity, a big rival, with a similar big reduction in its charges.
Other fund supermarkets are changing their prices too ahead of an April deadline set by the financial regulator.
The good news is most people should find it cheaper to invest in funds in future.
For example, a person investing £10,000 in an ISA in funds where Hargreaves or Fidelity has arranged special deals will pay an average of £99 a year. This is down from around £175 with Fidelity and down from £133, a big saving.
But those are just averages.
In practice what you will actually pay will depend on several factors: such as,
• how much money you have with the funds supermarket,
• whether it in is one account or more and
• what sort of funds you buy.
Hargreaves Lansdown and Fidelity are just two of a growing number of fund supermarkets, each with different charges, making comparisons between them difficult.
Over the coming months it will be possible to do more precise comparisons between the different fund supermarkets.
In the meantime I’ll explain some of the basics so you can keep up with the changes.
First of all what is a funds supermarket?
What it sounds like is the short answer.
Fund supermarkets is the new name to what used to be called discount brokers.
These are businesses selling investment funds at a cheaper price than if you bought the funds direct from investment groups.
Fund supermarkets offer thousands of funds from dozens of different fund groups. This means you can manage your investments in one place.
Fund supermarkets don't have stores. Most of the business is either done online or through brochures mailed to customers.
The price war is revealing to many supermarket customers how much they pay when they invest and who gets their money.
Until recently a person using a fund supermarket to put money in a fund investing in shares would pay an annual management charge of around 1.5 per cent.
That was split in two: with half going to the funds supermarket and up to half going to the fund management group.
However, some supermarkets took some more money off the fund manager and rebated or gave it back to customers as a loyalty bonus. This reduced the overall cost but still didn’t make it clear how much money the supermarket was making.
All that's changed.
The financial regulator disliked this system because it was unclear.
It ordered the fund supermarkets to ‘unbundle’ their charges.
Now investors will have to pay two sets of charges:
• a new annual fee paid to the supermarket. This can either be a fixed annual fee or a percentage of your money.
• On top of this they’ll pay a smaller annual charge to the fund manager, starting at around 0.75%
Some people are calling this fund charge ‘clean’ because it no longer includes the payment to the supermarket.
Some of the supermarkets, like Hargreaves and Fidelity, have gone further and arranged lower fund charges on a select list of funds. These have been nick named ‘super clean’.
It’s these ‘super clean’ charges that have enabled the big supermarkets to claim investors can get an all-in charge of 0.99%, considerably cheaper than before.
As you can tell, it’s all about as clear as mud.
So here are some tips to consider when looking at fund supermarkets:
Work out what kind of supermarket you want: Hargreaves Lansdown and Fidelity are undoubtedly more expensive.
Smaller supermarkets such as Charles Stanley, Clubfinance and Cavendish Online charge around 0.25% a year, which is a lot cheaper.
But they may not offer all the online tools you might want to help you choose funds. Their deals on fund charges are likely to be non-existent or not as good as the big supermarkets.
Watch out for additional charges. I’ve described the two main charges but there can be a wide variety of extra fees depending on which company you are looking at.
If you like to invest in other kinds of investments, such as investment trusts, shares or exchange traded funds you will be charged more by some supermarkets than others
As I said, making comparisons is going to become easier.
The good news is that investing in funds has got cheaper, just not simpler.
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