From confusing fees to charging for functionality we can't use, the regulator has put the boot into investment platforms. But will anything change?
The way that we invest has changed significantly in recent years.
For many of us looking to put money into stocks, shares or funds, the first port of call is now an investment platform.
Indeed, investment platforms now boast around £500 billion of assets under management, having almost doubled in size in the last five years.
However, according to the Financial Conduct Authority’s (FCA) interim study into how investment platforms are performing, there are a number of concerns.
Who is really the cheapest?
Firstly, it’s worth noting that for most people looking to invest via a platform, the regulator reckons that competition is working well and delivering a great service for investors.
But there remain a number of areas which clearly need improvement.
For example, a key concern for any investor will be the costs they incur in order to invest.
However, according to the FCA, investors who want to pick a platform based on price are finding it extremely difficult to do so, due to the simple fact that the fees charged by platforms are difficult to understand and compare.
I have first-hand experience of this. I use Hargreaves Lansdown for my SIPP, but have been intending to open a separate investment account for a while (you can view more SIPP options with loveMONEY here).
However, I keep putting it off because whenever I start comparing a few different platforms I end up spending an age going through their different costs and honestly start to lose the will to live.
And I’m in the relatively privileged position of being someone who writes about money for a living.
What about the millions of people who understandably have little interest in money matters, but know that they want to take the sensible step of investing some of their disposable income?
I have no doubt that there are some who end up sticking their money in a Cash ISA, knowing full well they will be getting a worse return, just to avoid the confusion that comes with investing.
It’s interesting that the FCA doesn’t have the answer either – it has called for platforms to show more “innovation” in the way they present their charges and costs data, in order to help investors get a better idea of what they are going to have to pay.
This could mean “interactive tools” so that they can work out what their costs their preferred investments would lead to.
It’s a nice idea for people that understand at the outset what they actually want to invest in, but I’m not sure how helpful it will be for novices.
It's not a complete solution, but loveMONEY has put together this roundup of the cheapest investment platforms to try and give you a clearer idea of how much you'll be paying in fees.
Build my portfolio for me!
Which brings me to the next problem area identified by the FCA, namely the ready-made portfolios that many platforms offer.
I can definitely understand the appeal of these – investment is an area of finance that I’ve not always found the easiest to grasp, so having the option to plonk my money into a portfolio that has already been built and weighted to suit investors with a certain mindset, whether cautious, adventurous or something else is quite an enticing idea.
I’m clearly not alone on that front either – according to the FCA, around 17% of people who choose to invest without the help of an adviser opt to put their money into a ready-made portfolio on offer from their platform of choice.
The study found that these particularly appeal to younger investors who are less active users of platforms and generally less affluent.
The trouble is that these platforms are not doing a great job of explaining precisely how they build these portfolios, which is making it much tougher for investors to compare across portfolios and across platforms.
What’s more, the terms they use to describe these portfolios may be similar but the actual content of the portfolios may be significantly different.
As the FCA puts it: “Similarly-labelled model portfolios may expose investors to different underlying assets and, in turn, a wide range of return volatility which consumers may not have expected based on the level of implied risk by their model portfolio’s label.”
Again, the FCA doesn’t have the answer, proposing “further work”, with the hint that it may have to force platforms to use the same terminology when describing these platforms.
And as always, we will have to wait sometime before anything actually changes – the proposed remedies from the regulator are now under consultation, with no developments until early next year.
So, for now, all we can do is try and avoid costly mistakes and do research ourselves to keep costs down without hampering performance. You can also review your various options at the loveMONEY investment centre.
If you want to learn more about retirement planning instead, read our comprehensive guide to pensions.