Transforming personal finance since 2011

#50 — Which broker should I use?

September 4th, 2019

By Andrew Craig

Reading time: ~ 13 minutes

Anyone who has followed my output for any length of time may know that I have been pretty regularly on record as an effusive supporter of the UK stockbroker / investment supermarket / platform company, Hargreaves Lansdown (HL).

In the “Complete Guide to Owning the World” document which subscribers to our Community get - I wrote:

"In terms of firms who offer a stocks and shares ISA, there are many that you might consider using. My favourite is the multi-award-winning Hargreaves Lansdown. I use them myself, quite simply because they have the best customer service of any company I use for anything in the UK (e.g. vs. British Airways, EDF, O2, Apple – you name it – HL are in a league of their own)."

…and I then went on to say:

"Some people think they are a little expensive… there are plenty of other good options these days. Here is a solid recent article on the subject which might help you choose if you would prefer to use someone other than HL. Do ensure, however, that whichever firm you choose offers you the option to invest in a wide range of funds and stock market investments and that they offer the capability for you to invest regularly by direct debit… This is very important in my opinion."

Recently, a fair few people have emailed to express their concern again that HL are expensive and ask if I still think they are a good option as against other providers such as AJ Bell Youinvest, Interactive Investor or Vanguard for example. Given how many people have been in touch to ask these questions, I thought it was worth putting some thoughts down in an email...

It's personal

As with most things in finance – the “right” answer on which stockbroker or investment platform to use and on what to pay will be specific to the individual. It all depends on your individual wants and needs. It is no different to buying cars, for example (there goes my use of the automotive analogy again ;-) !). Range Rovers are more expensive than Fords. Some people like BMWs and some people love Audis. I have a very wealthy friend who is a big fan of Skodas, even though he could fill his private garage with Aston Martins. It is horses for courses and each to their own.

I love HL and they have served me incredibly well in the ten years or so I have used them, but many of our readership have written in the recent past to express their concern about how “expensive” they are, as I say. So have I changed my mind?

...let’s do a little bit of work on the specifics.

The broad approach to investment that I advocate is pretty simple:

  • First: Work out what you can save each month. This is something that every single adult in the UK simply MUST do!
  • Next, save a ‘rainy day’ pot of cash to begin with from that money – to tide you over if you lose your job, for example.
  • Once this is done, invest (rather than ‘save’) that same sum every month without fail into something ‘sensible’.
  • Do this for the rest of your life until you have enough to retire (this can happen far sooner than you might have previously thought if you actually sort this out!)...

What is ‘sensible’ in this context will be different for different folk based primarily on your age and your attitude to risk. For most people, however, it will mean buying some kind of fund or funds every month, ideally regularly by direct debit, since this will remove you from the equation (a very good thing for your likely investment returns by the way).

Some of these funds will trade like stocks and shares on the stock market. These would include Exchange Traded Funds (ETFs) and Investment Trusts (ITs). To buy these sorts of funds, you have to pay a commission each time – just as you do when you buy or sell a share.

Most investment funds, however, work differently in that there is no commission to pay when you buy and sell them (usually at least these days). Instead, the cost of ownership is embedded in the fund and will simply impact the returns you make in that fund. Those of you who read my last article will be aware that our VT PEF Global Multi Asset Fund functions like that, as do thousands of others you might consider for your investment ‘journey’.

Understanding the costs of what you intend to buy...

The broad point I’m trying to make is that you need to understand what it is you want to buy in order to work out the costs you are going to incur, whichever stockbroking or investment company you’re planning to use. This actually isn’t that complicated once you have the basic gist and I cover all of these various costs and how this works in chapter seven of my book if you want to refresh your memory.

If you want to go down the route of buying ETFs and / or Investment Trusts, for example, HL and several other providers have an option where you can set up a regular payment by direct debit into those sorts of investments and pay as little as £1.50 a month of commission to do so (AJ Bell Youinvest also charge £1.50 per investment for this. Interactive Investor charge 99p – but you also have to pay a monthly flat fee for one of those accounts – so it could work out more expensive depending on how many trades you’re planning to make each month).

If you take this approach, HL are actually still exceptionally good value. You could set up automatic monthly investment in two or three Investment Trusts or Exchange Traded Funds each month, for example, and be paying as little as £3 or £4.50 a month to get this done – capped at £45 a year, as far as I’m aware.

This is a great example of the sort of thing I was talking about in my book when I said “today’s financial products and services are the best they’ve ever been.” As I have said before, investors in our parents' or grandparents’ era would have been utterly astonished that it would be possible to buy hundreds, even thousands of investment assets from all over the world for only £1.50 a month. This is night and day better than at any other time in history thanks to some fantastic innovation from financial services companies and I would contend that too few people in the general population have a clue that this is possible or are taking advantage of it – much to their detriment.

This having been said, I would argue that Exchange Traded Funds and Investment Trusts are potentially quite ‘advanced’ products to use for many people. If you own a tracker fund on a stock market such as the S&P 500 or the FTSE 100, for example, there is no protection when those markets crash. It is quite an advanced discipline to have a process / approach that means you know when to sell out and when to buy back in and very, very few people are up to speed on how to do that. It is also a huge administrative pain to own lots of ETFs or ITs in order to "own the world" and, indeed, to decide which ones to own out of thousands that you could choose from.

People have expressed concern that our fund is "expensive" versus these sorts of ETFs that are unquestionably "cheap" - but as I've said before - I think the difference is a small price to pay to get the assets chosen for you, a trend following overlay that should protect your downside - and to outsource the admin and worry (e.g. about what to buy which assets when). I have also said before that if we get out of assets in crash years - such that your max downside is 5-10% - and you run your own portfolio with no such methodology so that your max downside could well be 50% - you will wish pretty robustly that you were in an "expensive" fund vs. all those "cheap" ETFs and feel that this may have been a "penny-clever, pound-silly" approach to the problem.

Leaving this aside - whatever you decide to do - it is a relatively easy calculation to work out which investment platform is your best option in terms of cost. What I would say, however, is that I do believe that customer service is a key consideration in something as important as the company that you're intending to keep your money with.

As I have said above and before - the thing I love about HL is that someone intelligent, articulate and helpful invariably answers the phone when I call (within about four rings as it happens) and, in my experience over ten years, 100% of the time that person can help me with what I need doing. This is not my experience when I call pretty much any other company I use in the UK. I think this is worth paying a premium. (For the avoidance of doubt we have no commercial relationship with HL - I'm just telling it how it is in my experience, truly). HL also have a superb website and app with very impressive resources to help you look at a vast range of things that you might want to look at in the investment world.

To be fair - these days, other firms are pretty good too. I have no personal experience of using e.g. AJ Bell Youinvest or Interactive Investor - but I have heard very good things about both from plenty of happy customers.

For what it is worth - for those of you who have asked about Vanguard - they are a rather different animal. Vanguard only offers their own in-house products. These seem perfectly sensible to me but if you use them you should be aware that:

a) You will not have access to the much broader universe of products offered by folks like HL, AJ Bell, Interactive Investor and so on...

b) They do not have the trend following overlay that we have to protect you in a crash year. This goes back to my point above about buying ETFs potentially being a "penny-clever, pound-silly" approach to investment.

As with so many other things in life - sometimes buying the cheapest thing isn't necessarily the best decision. Certainly in the long term.

In conclusion

My own personal view about all of this is that I would suggest that you simply work out what is best for you. Once you have decided how you want to invest and what you want to invest in, it should be relatively easy to figure out the best way of doing that in terms of cost vs. customer service levels.

For more sophisticated investors, with more money, using a very cheap provider may well be the way to go. For someone who has less confidence about exactly what to do - using a company that costs a little bit more but with demonstrably fantastic customer service - who can give you a level of comfort about something as important as your savings and investments - may be a better way to go, particularly when your total pot is smaller.

I've been investing for about 20 years, have been using HL for about 10 of them and still use them. I think that lots of people in their 20s, 30s or 40s might go the same way, given how helpful they are and how easy they make the whole process. For someone a bit older and a bit more sophisticated, perhaps using a cheaper service provider is sensible given that fees are obviously a great deal bigger in aggregate for someone with £1 million vs. someone with £10,000. As I say - it is horses for courses.

If you hold investment funds, HL charge 0.45% on the value of your holdings up to £250,000, 0.25% above that up to £1m, 0.1% on £1-2m and nothing on anything over £2m (full details here). AJ Bell, for example, charge 0.25%, as compared to 0.45%. On a £10,000 ISA account - this is a £20 difference per year. On a £100,000 account, a £200 difference - and on a £1m account, no difference because of the HL tiering (more details about AJ Bell here). Interactive Investor, by contrast, offers various accounts with monthly charges that may save you money, depending on how you intend to use the account (more info here).

One other point I would make is that the Financial Services Compensation Scheme (FSCS) - only covers you up to £85,000 in the event that your stockbroker or investment company goes bust. Given this fact - anyone with more than that sum might consider having £85,000 with each of HL, AJ Bell, II or whomever else as their wealth grows. If I'm honest - this isn't something I worry about and I'd rather just have one login - but I know that other people are more concerned about such things.

Perhaps you don't need to use a platform at all?

One other point I would make is that if your affairs are pretty simple and you only want to buy one fund (in your ISA perhaps), it is often possible to buy that fund directly from the fund provider. Long time readers will know that I have been very positive about a Fund called 'Fundsmith' for many years now (happily, given that it is up 380% since launch). You can buy Fundsmith directly from them if you so desire. You can do the same with our fund via our fund administrator, Valu-Trac (application forms etc... can all be found at the bottom of the Funds page of our website).

I personally love the power and flexibility of using an investment platform but for someone with much simpler affairs, who just wants to buy one fund, going direct will of course save you that layer of cost. Again - it is a matter of personal choice.

(By the way - for the more cynical folks in our audience - none of the links to these investment companies above are affiliate links - just to be 100% clear. My aim is to provide impartial information here, nothing more).

...and finally

I'm sure this has been one of my most boring emails ever but I do hope that it has at least helped those of you in thinking about the best way you might go.

As ever - please don't hesitate to contact us with any questions or thoughts and we will do our best to point you in the right direction. There are lots of comparisons online these days. As with so many things - this stuff is relatively simple to figure out if you take a moment to do some "homework".

That's it for today. In my next article I will do my best to deal with a question I have had from people in dozens of countries in the last few months (this email has readers in no less than 65 countries nowadays, madly enough).

Namely: How you might go about 'owning the world' from places other than the UK.

This will no doubt be another wonderfully boring email for everyone other than the large number of you who have asked!