Beware of the hidden cost of hiding your cash in an online investment account
Be alert: investment platforms seek to obtain the highest possible profit
Online wealth platforms have transformed the way most of us invest for the future. Whether using a tax-friendly Isa, a pension or a share portfolio to build long-term wealth, these vehicles now allow us to take control of all our investments under one roof.
Do-it-yourself investing is best, where investors can constantly monitor the progress of their portfolio and make changes if necessary.
However, despite more than ten million investment accounts having been opened, these platforms – run by companies such as FTSE 100 Hargreaves Lansdown and Interactive Investor, owned by Abrdn – are not in business just to make the easier life for an investor. Their goal is to make as much profit as possible, which means customers should keep an eye on fees and charges.
Since interest rates began to rise in December 2021, investment platforms have seen a change in the behavior of many of their clients. Typically, when stock markets are booming, most investors use all their money to buy stocks and shares. But when markets are volatile and the outlook for UK plc is more pessimistic, they get scared, sell investments and temporarily retreat into cash, choosing to stay on the sidelines.
Historically, investment platforms have taken full advantage of this situation by paying customers disappointing interest rates on the cash they leave in their accounts pending reinvestment in the market. They have then used this cash in the money markets to earn a higher return for themselves (the business), sending their profits through the roof.
A few days ago, Hargreaves Lansdown, the giant in the world of investment platforms, highlighted how much this activity can bring them. Announcing booming profits of £403m in the year to the end of June (£269m last year), it revealed that the income it generated from cash held in customer accounts rose from £50 million to £268.7 million.
The increase in income, Hargreaves said, was the result of “increases in the Bank of England’s base rate during the period and the level of cash held by clients in investment accounts, partly offset by the transfer rate to clients.” “. The transfer fee? This is the amount that platforms pay for cash held in investors’ accounts. While these rates aren’t as bad as some of the horrible savings rates banks offer, they aren’t particularly customer-friendly.
As the table shows, the fees that platforms pay in cash vary. On Isas, it ranges from zero (Barclays) to 4.35 per cent (Bestinvest). In the case of self-invested personal pensions (Sipps), it ranges between zero (Barclays) and 4.35 percent (Bestinvest).
This poor treatment of cash holdings has been common for decades, although it was less of a problem when interest rates were extremely low. But with some easy-access accounts now paying 5 percent – and the base rate is 5.25 percent – the imbalance is evident.
If an investor has cash within an Isa investment platform, they can take it out and put it into a separate savings account paying better interest. But by doing so, they will lose the Isa tax shelter. As for pensions, it’s a matter of biting your lip and accepting the cash interest on offer, or investing the excess cash. At boringmoney.co.uk we compare over 30 investment platforms. A key factor we consider is the current interest rates paid on cash, which tend to improve the more cash you hold. The table analyzes the interest paid in cash by eight leading providers. As already stated, the picture is varied, so if someone plans to have a large amount of cash, it is worth investigating what interest will be paid.
Several platforms (AJ Bell, Aviva, Hargreaves Lansdown and Interactive Investor) have cash savings centers that are really easy to use. These are stand-alone centres, so unfortunately they are not available to be used with cash held within an Isa or pension.
Once a customer signs up, they can switch between savings accounts offered through the center. For example, AJ Bell offers a one-year fixed 6.1 per cent on its centre, while Aviva, Hargreaves and Interactive Investor offer 5.9 per cent, six per cent and 5.76 per cent respectively with a fixed one year.
A parting thought…
This doesn’t seem very fair… and it isn’t. In July this year, the city’s regulator, the Financial Conduct Authority, issued a warning about the low rates paid in cash by wealth platforms.
New rules are already in place under the collective heading of ‘consumer obligations’, to force providers to pay more attention to better outcomes for customers.
Perhaps these rules will eventually force platforms to pay better interest rates in cash. Maybe not. For now, the reality is that an investor who has cash inside an Isa or a pension on a wealth platform is not getting much. Investor beware.
- Holly Mackay, is founder and CEO of investment website boringmoney.co.uk.