Old hands vs new kids on the block: Investment platforms battle for customers
Last year marked a significant change in attitudes towards retail investing in the UK, after the Treasury made tearing consumers away from the safety of their cash savings a firm ambition.
In the government’s bid to revitalise London’s flagship index, Rachel Reeves slashed the cash ISA allowance from £20,000 to £12,000, introduced a three year stamp duty holiday for new listings and hiked dividend taxes on investments held outside tax-free wrappers.
But it’s not just the government who are looking to lure investors to stocks, with trading platforms now finding themselves going head to head in a cluttered market to win over customers.
Stalwart DIY platforms, which for years have dominated the market, are now contending with a wide number of digital upstarts, many of whom are promising tech-savvy consumers a new way to invest.
Digital platforms’ growing presence in the market has set off alarm bells among old school companies, leaving them scrambling to win back trust, with some analysts crediting the pivot away to a lack of knowledge on performance.
Stuart Cash, chief executive of Y Tree, said: “The trust battleground is now transparency.
“Many people come to us saying that they don’t really know how well their wealth managers are performing.
“Clients receive reports from their wealth managers, and many traditional platforms are becoming more digital, but these aren’t providing the tools to properly benchmark returns and costs.
“People want to understand, in plain English, what they own, what it’s costing them, and how it’s performing.”
The problems with fees
Established platforms tend to charge higher fees in exchange for a more premium service, with many tending to hike their fees depending on a plan’s offering.
For many platforms the allure of more benefits such as access to JISAs and lower charges on buying and selling funds, can pull in customers.
According to the latest results from investment management giant Aberdeen, subsidiary Interactive Investor reported a 14 per cent year on year increase in customers to 500,000, with an overhaul to the pricing structure set to take effect from February, ranging from £5.99 to £39.99 per month.
However, not all investment platforms are able to follow suit, with the UK’s largest DIY investment platform, Hargreaves Lansdown, cutting its annual account and share dealing fees earlier this week.
The move is set to cost the company tens of millions of pounds, with the firm’s “headline” account charge falling from 0.45 per cent to 0.35 per cent as of March.
Share trading fees will be reduced from £11.95 to £6.95 per trade, while fees on ready-made pension plans will fall from 0.75 per cent per year to 0.45 per cent, but fund trades will incur a new charge of £1.95.
Richard Flint, chief executive of Hargreaves Lansdown, said that the move was “more about us reinvigorating the business” in order to face other platforms.
He told the FT: “Competition has been developing for quite a long time and it’s not a surprise, it’s coming in many different forms.”
The argument for low entry barriers
While established platforms reassess their approach to fees, young fintechs are diverging away from the traditional route.
George Sweeney, investing expert at comparison site Finder said: “We tend to see quite different strategies from the newer investing apps compared with legacy investment platforms.
“The newer players in this space operating more like fintech startups rather than traditional brokerages typically come with lower account fees and trading costs.
“This creates a low barrier to entry, allowing prospective investors to try the platform without making a major commitment.”
In particular California based company Robinhood has tightened its grip on the personal investment market through offering commission free trading on US stocks and no FX fees as part of its aggressive UK rollout.
While the firm, which shot to fame during the meme stock craze of 2021, remains the pivotal digital player in the market, a number of other providers are jostling for market space.
Etoro, which has been deemed by analysts as a good platform for beginners, offers zero commission on stocks and ETFs, while Freetrade offers commission free investing but does charge subscription fees.
Sweeney noted most platforms are happy to use this “loss-leader marketing strategy” due to the belief that investors will be impressed if they are able to give “the platform a chance”.
He said: “Investors essentially have nothing to lose by giving it a go.”
However, investors opting for digital platforms have been urged to be cautious by industry watchdog, the Financial Conduct Authority, after a number of advertisements from unregulated platforms began appearing on social media and public transport.
On Tuesday, it was uncovered that Trading 212, one of Europe’s largest investment platforms, sold cryptocurrency linked products to UK retail investors without authorisation from the FCA, only receiving permission on 26 January.
Time will tell
Away from the clash of fees and premium offerings, established platforms opt to focus on incentives such as cashbacks, with AJ Bell offering up to £500 to cover exit fees charged by providers upon transferring a SIPP, ISA or dealing account with them in some circumstances.
Meanwhile, older platforms are more likely than their fresher counterparts to be less reliant on chatbots and self-service tools, instead offering phone-based customer service which elderly customers still rely on, coupled with financial advice services.
However, Sweeney added that while platforms are offering a wide range of perks, they work due to being aimed at different audiences, with the question now being which sides’ approach will work in the long run.
He said: “Newer apps are targeting first-time or smaller investors who may start modestly but could grow over time, while established platforms focus on investors who are willing to pay higher fees for service and support from day one. Neither approach is inherently better.
“The real question is whether today’s small investors will become long-term, high-value customers, and whether those paying premium fees will continue to see enough value to justify them or eventually migrate to the cheaper, leaner platforms.”