On Monday, Interactive Investor announced a change to its charging structure to adopt Netflix-style pricing. It talked about having an “easy, modern price structure” just like the streaming service. It said that’s what its research told it customers wanted.
Perhaps they do. Don’t get me wrong, I like II’s flat and transactional fee structure. You have a subscription and pay for any extras you use.
Just about every other direct or advised platform operates by applying a percentage-based charge to total assets under administration and this generates most of their revenue.
The argument here is that the cost of administering a £50,000 portfolio is almost the same as a £5m portfolio thanks to technology. II, Halifax Share Dealing, IG and I-Web make the case against percentage-based charging and use flat fees. As asset value increases, a customer’s charges remain the same.
But therein lies the problems with flat fees and pay-for-what-you-use from the provider’s perspective:
1. Flat fees need to be increased every so often to keep pace with inflation. When it happens, it is in the customer’s face, unlike ad valorem which links to an asset value hopefully increasing with inflation.
2. Providers that rely on transactional activity for revenue want to encourage as much trading as possible, hence broker platforms write content about equity picks and company research. That type of structure is about trading rather than investing.
II has taken a leaf out of the FCA Prod 3.3 playbook and segmented its client bank and priced accordingly:
|Interactive segment||Customer need||Deal allowance per month||Extra trades||Platform fee/month|
|Old structure||One size fits all||1 (approx)||£10 or £6||£7.50|
|Investor||Occasional equity trader||1 free trade||£7.99||£9.99|
|Funds fan||Fund based buys and holds||2 free fund trades||£7.99 (£3.99 for funds)||£13.99|
|Super investor||Frequent equity trader||2 free trades||£3.99||£19.99|
*Old structure is based on quarters, converted here to monthly equivalent for comparison.
The transactional model is still there with extra trades costing £7.99, except for super investors, in which case it is £3.99. Overall, it is not a price cut either. II admits not everyone will be better off as the flat fee has increased, although trading fees have been cut across the board.
I like this segmentation. Getting anybody in marketing to have anything less than 32 segments is an achievement.
All three users should be happy. The occasional equity trader is getting deal terms on par with market price, the funds fan doesn’t feel he is wasting his free trades, as they accrue and last for 90 days, and the super investor is getting a much better deal — while trades may be cheaper on execution-only platforms, they are nowhere near as user friendly.
We ran the new pricing through our free comparetheplatform.com modelling tool and created the following values for heatmaps.
For Isas, we have used the funds fan package and 24 fund trades which keeps it inside the limit. At £50,000, the old package was more expensive because it had fewer free trades. Low-cost Vanguard offers a challenge on smaller cases and has a price cap. Our analysis supports II’s marketing claims on price and knock out AJ Bell, Fidelity and Hargreaves on larger case sizes.
The Isa platform fee is low. For the funds fan it works out at £167.88 a year. If we use a handy-sized Isa portfolio of £335,760, that is going to cost 0.05 per cent pa, so well below average.
For Sipps, there is an extra £10 monthly fee, so the fee comes in at £287.88. On a £575,760 portfolio, it is 0.05 per cent, so also well below average.
Customers with large portfolios are better off with flat fee pricing. Even if they trade, it is a fixed cost and relatively small in percentage terms. Customers with small portfolios fare less well and the cross-over is around the £30,000 size. With most platforms, fund-switching is free so, if this is very frequent, an alternative platform might be better.
The same analysis done using 100 per cent equities/ETFs gives a different result, as AJ Bell, Fidelity and Hargreaves cap platform charges on non-fund assets. The cost of ownership is much lower than funds even with trades added in. A funds fan using equities would get a £7.99 credit per month for dealing fees. That would offset £15.98 month for the equity trades in this theoretical example.
II produced marketing material with values similar to the table below. It assumed a 5 per cent growth rate in fund value and costs over 30 years.
|Platform||Value after 30 years||Total charges||Saving with II|
|II funds fan||£648,295||£10,671|
|AJ Bell You Invest||£626,577||£22,201||£11,530|
*Assumes 30 years in a Sipp, £150k initial balance, 40 trades per year, 100% fund trades, 5% pa return in the portfolio.
Our 10-year analysis supports its direction of travel, though we do have concern over the 30-year figure. The calculation assumes the II flat fees remain at current levels, when they would index in line with inflation.
The nominal charge of the II portfolio stays the same but assumes 5 per cent growth so, as a percentage, cost reduces. For the ad valorem competitors, the percentage cost stays the same but nominal cost increases every year. If this has been taken into account, I apologise.
Over shorter periods, we concur II is cheaper for those larger £50,000+ portfolios.
There are two possible reasons II has engaged in this campaign. First, an attempt to grab business from AJ Bell, Fidelity and Hargreaves Lansdown, in particular.
It highlights the £30,000 difference in charges and says: “That means you could retire earlier, go on the holiday of a lifetime or create an extra legacy for your family”. Ouch. I have not seen price comparison marketing like this in investments for years.
Success will be down to how price-sensitive these rival customers are. Research suggests direct-platform consumers are more sensitive to price than they used to be. The figures are stark and should elicit a marketing reaction. It will be followed by price activity if assets start to move. One response could be price caps.
The second reason is commercial. There has been a financial whirlwind wreaking havoc through stockbroker firms. They have suffered badly with the costs of Mifid II and the move to passive investing. When markets are uncertain (like now), trading activity dries up and profit from stockbroking activity goes down.
We have seen this in the City with falling profit at brokers Cenkos, Shore Capital and Winterflood. Lower investor trading activity, particularly in December, was mentioned. In February, Walker Crips announced a profit warning, citing low levels of volume-driven broking commission as investors held off due to Brexit.
II will face the same pressures. Moving to a monthly subscription will bring the money in more regularly and make it easier to manage than trading rebates.
Its main shareholder JC Flowers will expect a strong return on capital, so II may look to offer revenue streams that enhance this. A DFM proposition is now available which will bring in value but also paves the way for advisory services such as robo, face-to-face or both, perhaps also using Netflix pricing.
Gavin Fielding is editorial director at Fundscape