Our sister company interactive investor quietly waived exit fees in 2017 and permanently scrapped them this month. Will other platforms follow suit?
In a financial world where transparency for consumers has become a huge buzzword in recent years, one of the biggest relics from a past, non-digital age is the platform exit fee.
Although some online brokers have eliminated these fees already, for many it’s still customary to charge customers who want to transfer to another platform a fee per holding, typically between £10 and £25 (capped at an upper total charge in some cases). So if you had a portfolio of 20 funds or stocks, you might be charged up to £500 for the privilege of departure.
Transferring platforms is already by its nature a disruptive and potentially frustrating exercise for investors, and exit fees of possibly hundreds of pounds just make it an even less appealing prospect. Moreover, for a transfer to make financial sense, the new site has to offer savings at least in line with the exit charges – yet customers may want to move for other, non-financial reasons such as poor customer service or a better range of available assets.
It’s therefore cheering to see our sister company interactive investor (ii) scrapping its exit fees altogether – making permanent a temporary suspension that has been in place since the platform’s merger with TD Direct Investing last December. Prior to that, ii customers who moved away were charged £10 per line of stock, capped at £250.
Streamlined transfer process
The historic justification for exit fees has been the fact that transfers involve extra paperwork that must be paid for, and that if there is no targeted charge for the work involved then loyal customers are picking up the tab for those who head for pastures new.
In principle that seems a fair point. But just how much work is actually involved in an online transfer in this digital age? As ii’s Rebecca O’Keeffe explains, the process is kickstarted by the customer opening an account with the new broker and filling in a form detailing the various holdings to be transferred. The new broker then contacts the existing provider, who provides a list of the assets, their value and details of any tax wrappers for that client.
“Once both parties are happy that all the details match, it’s then a question of whether the two systems can facilitate a digital transfer, which should take a matter of days; otherwise it’s a manual transfer, which for ‘in specie’ assets involves deregistering each holding from one nominee account and reregistering it with the other,” she says. “There is administrative work involved, but automation has made it much easier and faster than it used to be.”
It could be argued, then, that it’s fair enough to levy a small charge, proportionate to the work involved. But it’s hard to see how the admin involved could justify anything of the order of £25 per line of stock in these days of automation and digitalisation.
Mark Polson of platform consultancy the lang cat is one commentator who is pleased to see the exit fee in the dock. “The ‘per line’ approach is a relic of a time when we didn’t have online or automated transfers. I’d have more sympathy if platforms charged pennies for online transfers, and pounds for transfers where manual intervention or paper was required. But they don’t,” he comments.
Moreover, the platforms are already charging an annual administration fee; in a transparent, non-sticky world where the customer’s interests are to the fore, surely that should cover the costs of transfers out. As Polson puts it: “The investing lobster pot should have had its day a long time ago. Platforms make their coin on an ongoing basis; it’s not right to take a slice out of people who want or need to leave.”
Apart from anything else, unrestricted departure should really help to focus the minds of the big cheeses running investment platforms. If customers can vote with their feet easily and at no extra cost, managers need to keep their eyes very firmly fixed on all the factors that make a top-notch platform, including clear and competitive pricing, top customer service and high-quality additional resources.
In fact, ii’s move is very much in tune with the sentiments of the regulator, the Financial Conduct Authority, which homed in on the evils of exit fees in its recent Investment Platforms Market Study. As the FCA reported, “Barriers to switching are significant and could limit the pressure on platforms to provide continued value for money.” It has proposed measures to make the switching process easier, including banning exit fees altogether. The final report is due in the spring.
So the challenge is there and the clock is ticking. Will other platforms follow suit and jump before they’re pushed? As Mark Polson candidly remarks, “We now turn our eyes towards Bristol to see if Hargreaves Lansdown will follow this welcome trend.”