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Spotlight falls on investment DIY platforms

THE rules on how individuals can distribute their personal Isa allowance were relaxed at the start of this month, meaning you can put as much as £15,000 each year in stocks and shares, ring-fenced from any tax liabilities, for the first time.

This puts the spotlight firmly on the middle men who will be helping thousands of Scots to manage their own investment portfolios - the fast-growing world of the DIY platform.

The platform is the catch-all term for a range of online businesses that provide a shop window and hosting service for your investment choices. They allow you to pick whatever investments take your fancy - from funds and investments trusts to shares in individual companies - and place them in a virtual account or tax-efficient wrapper.

Why are these platforms on the rise? The industry stresses that returns on equities are better in the long run than the paltry interest on cash accounts. Tethered to a record-low base rate set by the Bank of England, rates for cash Isas rarely surpass three per cent these days.

Meanwhile, financial advisers, traditionally the gatekeepers to the investment world in the pre-internet era, have also been compelled by the Retail Distribution Review to levy fees or charge a percentage on new clients' ­portfolios. This replaces the old system where advisers provided a seemingly free service and were paid in commission by product providers.

The explicit cost of this advice can be off-putting for less wealthy investors, who wonder whether they can make the whole process cheaper and easier by taking the DIY option.

Platforms offer control and convenience, but they will also be taking a cut from your portfolio, and the regulator's attempts to improve cost transparency in this blossoming industry are not working out as planned.

Mark Polson, principal of the lang cat, the Edinburgh-based platform consultancy, said: "Direct-to-consumer platforms are, at their very basic level, quite easy to understand. They let you buy investments.

"They allow you to hold those investments over a period of time. And they let you sell investments, or convert them to income producing financial products. That is it. However, the way in which different providers allow you to do all that stuff varies dramatically, and the various charging structures can be mind-bogglingly difficult to get your head around."

The same regulatory regime that banned advisers from taking commission on new ­business has also banned platforms from taking a slice from the annual management charge - typically 1.5 per cent - charged by an investment house once a platform user goes into one of its funds.

Surely that means investors will see a separate, flat charge for using the platform that's easy to compare? Mr Polson says it will not be this simple.

Firstly, it depends on how much money you hold with the platform. Some charge a flat percentage on assets while many have a variety of price brackets depending on how much is invested. Furthermore, those who want to chop and change their portfolio, as opposed to buying and holding their ­investments, have high trading costs to consider.

Whether a platform offers good value overall is difficult to judge, Mr Polson said. "There are areas where providers are trying to differentiate themselves. Things like front-end web user experience, investment choice, customer service, tools and calculators to help customers understand their investment risk profiles and exit charges are all important factors to consider alongside price."

Major platforms such as Hargreaves Lansdown are also clouding the issue by claiming to offer investors the best deal on household name funds, such as the one recently launched by famed star manager Neil Woodford. The fund supermarket claims it has the clout to negotiate a lower charge than its rivals - effectively 0.6 per cent - to host Mr Woodford's latest investment vehicle, the CF Woodford Equity Income fund.

Mr Polson warned: "Hargreaves built its business and enviable reputation before industry legislation forced providers to become more transparent on charges.

"Now that charges have been laid bare for everyone to see, it has become clear that Hargreaves Lansdown are by no means the cheapest direct platform on offer."

That is mainly because Hargreaves has a relatively high administration fee at 0.45 per cent, which could wipe out any savings made by its so-called "super-clean" pricing for certain funds. So choosing platforms with low or no administration fees can also make a difference to your returns in the long-run.

New platform users will need to tread carefully if they wish to switch some of their tax-free funds back into cash when interest rates start to climb.

The lang cat's latest research has revealed that 14 out of 22 platforms will levy a charge to transfer money from stocks and shares into cash, with Alliance Trust Savings charging as much as £100 plus VAT and £20 per stock. Investors can escape such charges by using AXA Self Investor, Cavendish, Fidelity or Bestinvest, among others.

Finally, platforms are not technically qualified to give you any advice about which options might be the most promising, even though many are packed with investment information.

That means you have to take responsibility for any losses incurred by your decisions, as the Financial Ombudsman will only compensate those who have received unsuitable advice from an IFA.

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