Break-ups can be messy. Saying “sayonara” to something you have spent a lot of time, money and effort investing in is not without consequence.
This is also the case when it comes to transferring a stocks and shares Isa account to another provider.
Investors seeking to move their money to a cheaper broker could face barriers in the form of exit fees by the ceding platform. In other words, they can hinder investors from getting the best deal on their savings.
The charge varies, depending on the broker, but generally remains around the £20 mark for every fund, share, investment trust or bond moved between brokers.
Though the charge may be relatively inexpensive to those with a single holding, the cost could quickly escalate for the more seasoned investor with an expansive portfolio.
So those with 50 holdings would face the prospect of £1,000 in exit fees.
The dilemma facing these individuals is the benefits of a broker offering a better deal versus the cost of such a move.
Not all brokers levy exit charges on customers but many of the leading providers do.
Hargreaves Lansdown and Barclays Stockbrokers impose a charge of £25 and £30 per holding respectively to clients seeking to re-register their investments.
Some providers instead opt to issue a one-off charge for stocks and shares Isa closures. Alliance Trust, for example, charges a grand total of £120 (including VAT).
Mark Polson, principal and founder of investment consultancy the Lang Cat, based in Edinburgh, has been outspoken in his vehement opposition to the charge.
He said: “I don’t think taking a slice out of customers who have the temerity to leave you is a good way of working. Platforms are meant to be hotels, not prisons.”
Adding that the fee was not fair or necessary in most cases, he said: “Half the time receiving platforms end up meeting ceding platforms’ charges with special introductory offers.
“We could just lose the exit fees, stop the merry-go-round and it would all come out in the wash. I particularly don’t like seeing providers who charge percentage or ad valorem fees charging exits – it’s either all-in or it’s not.”
Echoing this view, Carl Melvin, director of Renfrewshire-based Affluent Financial Planning, said investors looking to transfer their Isa are caught between a rock and a hard place.
“Investors usually only leave their provider if they are not satisfied with the performance of the fund or the service they receive. Sometimes investors are just looking to spend the money on a car or wedding for example,” he said:
“Providers should look at themselves and ask why the investor is asking to leave. They should be open to change if it is because of issues on their part, instead of issuing the charge.”
The controversy surrounding the issue has not escaped the attention of the City’s financial watchdog.
A spokeswoman for the FCA said the body expected the levy to be “proportionate” to the cost of actually exiting and should not be a barrier preventing someone moving away from a particular product.
ISA transfers come at provider’s expense
Given the amount of administration work that is involved in the process, perhaps it is only fair that providers are able to pass the charge onto an investor seeking to jump ship.
Danny Cox, head of financial planning at Hargreaves Lansdown, based in Bristol said: “Re-registration involves a considerable amount of manual work on a per-line-of-stock basis, hence the charge for each holding. Transfer charges are common in the industry with 15 other platforms all charging for transfers as stock.”
For Alliance Trust, exit fees are imposed when relevant, rather than embedding the cost of the “considerable” amount of administrative work involved in closing an account in their overall fees – according to Sara Wilson, head of proposition at the investment and savings business.
“We work hard to ensure that our fees are fair, clear and transparent for all our customers,” she said.
A spokeswoman for Barclays Stockbrokers said the charge takes into account the processing and the level of staff support required which increases in line with the number of assets/lines of stock held within the portfolio.
The stockbroker, however, does not charge to transfer the investments out as cash – although there may be consequences for the client to consider, including tax and the cost of acquiring the assets again.
“Depending on individual circumstances, this could be a more cost-effective option for investors who intend to change the investments in their portfolio,” she added.
However, some fund shops, such as Fidelity Personal Investing and Axa Self Investor have waived the charge altogether.
Jon Everill, head of advisory services at FundsNetwork, Fidelity’s platform for financial advisers, said their approach was to avoid exit fees due to the detrimental impact they can have on clients.
Adrian Lowcock, head of investing at AXA Wealth, said that exit fees were not transparent and posed an unfair barrier for investors wanting to leave a service because it was inadequate or no longer suited their needs.
He said: “Ease of transfer will encourage self-investing platforms to provide excellent service, useful tools and clear communications – at a fair price. Exit charges are one of the last vestiges of poor product design. Those who use them claim they are passing on administration costs; however, in the modern world of technology-based investment platforms those charges look increasingly archaic and are no longer appropriate.
“The cost of platforms has started to come down but the cost of transfers has remained high – the motivation to remove this cost isn’t there.”
In a fiercely contested marketplace, providers are constantly seeking ways to one-up their rivals by offering the most attractive product – but exit levies could prove to be an obstacle preventing investors from securing the best deal.
Though the concept of the charge has been heavily criticised by IFAs, many of the leading providers choose to impose the charge on clients given the administrative tasks involved.
But according to Affluent’s Mr Melvin, this great administrative burden only involves the “pressing of a few buttons”, which does not justify charges amounting to more than £20 a holding.
But what should become of exit fees in the future?
“Hopefully a strong laxative and early retirement,” Mr Polson said.
“In reality I think we’ll see a split between all-in ad valorem and pay-as-you-go fixed-fee models, with the latter including exit fees and the former giving them a miss. Even that second group will, I think, come under pressure to bring costs in line with reality – £25 per holding, for example, is iniquitous.”
He added: “There is only a problem with exit fees because direct-to-consumer platforms think they can get away with it – enough pressure from investors and they will, over time, go.”
Myron Jobson is a features writer at Financial Adviser
Key points
* Investors seeking to move their money to a cheaper broker could face barriers in the form of exit fees.
* The amount of administration work that is involved in the process suggests it is only fair that providers are able to pass the charge on to an investor.
* Exit levies could prove to be an obstacle preventing investors from securing the best deal.
