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For investors who, like me, have only ever invested during the internet age, it’s hard to imagine week-long dealing periods and paper share certificates. My first investment account (an ISA set up with IG) cost me £24 a quarter with no added fees to buy funds. By the time I felt confident enough to start buying shares the price for share trading had come down to just £8 (it has since fallen further and the quarterly fee has disappeared).
Still newer investors - those who were swept up in the market hype of the last couple of years - find the history of share dealing even more unfathomable. I have a friend who has just closed his Freetrade account and withdrawn the funds because the platform raised its prices from £3 a month to £5 a month for the basic account (a free account is still available but you can't open an ISA with this). According to him £60 a year just isn’t worth it.
It’s a far cry from the experiences of private investors who became enthralled by the markets last time a share dealing revolution was afoot. In the 1980s when big British businesses were being privatised causing a rapid uptick in demand for individual investor share dealing, execution-only brokerages began popping up all over London. The arrival of competitors from the US helped bring down prices, while the internet put paid to cheques, share certificates and telephone-only dealing.
A similar surge in demand in the last few years has seen another new generation of private investor-friendly brokerages spring up. This time they come in the form of apps.
Freetrade has taken the market by storm, racking up a user base of over 1m investors. It faced early competition from US-born Robinhood, whose difficulties during the Gamestop saga halted adoption in the UK. More recently we’ve seen the launch of Dodl, an app-based share dealing platform from AJ Bell. eToro has become the cheerleader for ‘social investing’ and claims to allow you to copy other investors' successful portfolios at no charge.
And as the new kids on the block have started to gather followers, the incumbents have felt the need to change their ways. interactive investor took the first strides towards a more holistic offering by buying up many of its competitors, including one of London’s original online brokerages, The Share Centre. More recently, Hargreaves Lansdown - the UK’s biggest online stockbroker - announced a £175m investment programme in tech which will allow it to offer more competitive prices. Meanwhile,
The question for existing private investors is whether we should be woo-ed by the hot new apps, or whether we should stick with our current platforms in the hope that their fees will climb down eventually.
Headline brokerage fees don’t mean an awful lot for regular stockpickers. It’s the dealing costs, foreign exchange fees, dividend reinvestment fees and the spread on offer which really make the difference.
We have compared the 10-year return net of fees for some of the leading platform-based brokerages available in the UK:
Let’s take a look at how those fees compare with a like-for-like comparison assuming an investor has an initial investment of £10,000, an annual deposit of £2,000, 4% average share price growth and 1.5% income return. The target holding for the portfolio is 40 UK stocks and 10 trades per month are made on average.
The chart shows that Dodl wins by quite some margin, costing £350 over ten years and leaving investors with a total pot of over £40,000. By comparison, Hargreaves costs over £10,000 over ten years and an investors’ closing pot in this hypothetical scenario would be £27,000. Freetrade, ii and IG cost £1,198, £2,867 and £3,600 over ten years respectively and their final portfolio performance reflects that.
But before you all dash off to use Dodl or Freetrade, it’s worth being aware that the service on offer isn’t what you may have come to expect from your existing broker. Dodl might be part of AJ Bell but it only offers 50 British stocks and nothing smaller than a FTSE 350 company.
Freetrade has added many more markets and indices in the last few years and the UK small cap space is now available alongside some of the larger markets in Europe and a decent selection of stocks in the US. With the plus account you can also set limit orders and stop losses, which makes it far more enticing for a regular trader. But there are still gaps in the service. For example, Freetrade only allows you to buy stocks long and there is no trading on leverage available (although that might not be a bad thing). What’s more, while the app is very user-friendly, the data available on stocks is not especially comprehensive and the charting tools don’t allow for technical analysis like they do at IG.
And for international stock picking you would actually do better sticking with IG, which now has no ongoing fee and transactions in the US are free. The FX charge at IG is 0.5% on top of the spot rate, which is slightly higher than it is at Freetrade (0.45%), but it still works out cheaper in the long run.
Investors thinking of moving their whole portfolio into Freetrade should also be slightly cautious of the business model. Perhaps unsurprisingly for a company which is so generous with its fees, Freetrade is heavily loss making. In the 2021 financial year to September, the company reported £18.2m of losses before tax off just £12.7m of revenue.
A lot of money is being eaten up by the company’s continual investment in its cloud-hosted app, which management claim is helping to reduce completion times for share dealing. Time to complete basic orders is now less than half an hour of average, which compares favourably with even the biggest brokerages. The cloud model also allows the company to keep expanding the platform as more customers join without a fundamental change of tech stack - something that will help it keep costs down in the long run. But for now, keeping costs down is far from important. Freetrade hired 121 new staff in the 2021 financial year and now has well over 200 people working at the company. There are currently 12 vacancies - mainly in engineering - on the company’s job board.
With deep-pocketed investors including Molten Ventures (formerly Draper Esprit) - which led the £12m Series A fundraising round in 2019 - and New York private equity firm Left Lane Capital - which led the $48bn Series B fundraising round last year - the losses aren’t currently too much of a concern. Meanwhile, Freetrade’s growth is incredibly impressive. Assets under management exceeded £1bn for the first time in late 2021, compared to £249m at the end of the 2020 financial year. Trading volumes were £3.3bn in FY2021, compared to £0.8bn the previous year.
But Freetrade is not making much money from the assets, which is hardly surprising considering the company is only earning a maximum of £9.99 per month, plus a little interest on the cash in accounts and some FX fees from its users. The average account size of a Freetrade user is just over £1000 and the company is making roughly £14 per user. Surely that is not a sustainable business model.
Compare that to IG which is hugely profitable thanks to the amount of money it makes on leverage investing. For investors looking for a financially resilient place to store their savings, it’s not hard to pick the better platform. Just don’t be tempted by the spread betting accounts at IG unless you’re an experienced investor. There is a reason the company is so profitable and it isn’t because its customers are super successful.
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I like HL, the are good for pensions and just buy and hold strategies because there are no maintenance fees, unless you have funds (unit trusts and OEICs). So stocks and Investment Trusts cost nothing per year to own. The trading fees are negligible if you have large holdings.
Lee, unless I've misunderstood your post with HL you can set a buy limit order and set stop losses within an ISA or share trading account. I've never used shorting but I think HL have a different type of account for that.
I understand the points from this article that there are good reasons not to consider the cheapest Dodl (not many stocks) and the next cheapest Freetrade (it might too bust as it doesn’t make much money - bit dubious) but then why does it skip the next cheapest interactive investor and skip to recommend IG? Odd. It’s also odd how it only compares them on starting with 10k and investing 2k a year. This is very specific. The comparisons will be different for different scenarios. Reads a little like a advertorial for IG to me.
why not use IBKR (Interactive Brokers)? Great platform, strong financials/security of funds(my opinion, no guarantees!), and great access to equities, ETFs, and international markets also. Great rates with extremely low spreads in the Pro version too!(and they don't sell trade flow for Pro users)
https://freetrade.io/legal/kee...
From the above:
Apologies for the bold type, which I can't alter, as I've copied and pasted the above section directly from their website article, but think its pretty clear both funds and stocks are protected.
Assets and cash may be protected from Freetrades liability but in a recent case (SVS or Beaufort I think) they were used by the administrator to pay the costs of sorting it all out on behalf of the asset owners, and they charged handsomely for it.
It also took ages so people had no control over their holdings, committed to holding for a couple of years in effect.
So yes, in theory you're protected but in practice I don't want to find myself there.
Thanks for this LittonOwl. That's very interesting.
I've just seen Doug2500's response above - it was the Beaufort case I was thinking of.
I'm not sure if rules have been changed since then, but one of the reasons I like HL is because I can regularly see that they seem to be quite financially secure.
Do you know any that do this? I used to trade on the ASX using CommSec and part of my strategy was to set a buy order once a stock hit a certain price on the way up based on previous support and resistance lines, the strategy worked well but interested if there's any UK tools that do the same?
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Absolutely agree. I read recently that the average PI trades once a month. I dont believe that most investors, even with portfolios in the 100's of 000's, trade 10 times a month. so the comparison for most people would be very different and execution, and pricing are far more important.