How To Choose The Right ISA - Choosing Your ISA Manager

If you invested into the ISA’s predecessor, the Personal Equity Plan, ten years ago you normally had the choice of investing with one provider, for example Jupiter, and had to choose one or a number of their funds. PEP managers typically offered 20 or 30 funds to choose from, all covering different markets and risks. For example, you could invest in a South East Asia fund or stay closer to home with a UK fund. 

The last decade has seen an incredible amount of innovation in the investment market. The way in which you can invest has changed massively: 

Invest direct with ISA provider 

This option is still available, but in our experience rarely used. If you were investing with, say, Jupiter, you would complete their ISA application and nominate your fund(s). The main drawback with this method is that you could be restricted to using the funds of one provider. 

Invest through a fund supermarket     

With this option you invest through an administration company who are authorised to set up your ISA. You then have the choice to invest in hundreds of different funds from many fund providers. One such fund platform is cofunds. They offer access to 57 fund managers and over 300 funds.

The main advantage to this route is that you can pick funds that are the most appropriate in each asset class. No one fund manager can be the best in each category so this is a huge advantage.  

The charges are typically the same as investing direct with the fund manager.  

Invest through a wrap platform 

This takes the fund supermarket approach to the next level.  

A “wrap” service allows you to hold whatever unit trusts, cash, investment trusts and shares you like with one set of paperwork, and within a choice of tax wrappers (ISA, pension etc).  Switching from one fund to another is also straightforward with reduced initial charges, and transfers completed on the same day, without losing exposure to the market, ensuring that if markets rise while you are switching, you should not miss out. 

For example, one of the services we use at Rutherford Wilkinson is called Transact, and is one of the most established and comprehensive administration platforms available in the UK.  Although Transact has only been available in the UK since 1999, it is based on a system developed in Australia, where over £12billion of investments are held on this basis.

These services are also well established in the US and elsewhere. Over £2.4 billion is now invested through Transact in the UK (as at March 2006).

The main advantages of a wrap are:

• Reduced paperwork.
• Valuations available online, via username and PIN.
• Funds can be switched from one investment provider to another with minimum delay and a reduced initial charge.
• Competitive terms for funds held in cash, with immediate access
• A single point of contact for all valuations etc
• Access to discounted institutional asset class investments

The main disadvantage is that the additional functionality adds to the costs of managing your investments.

Invest through a discount broker

This route is appropriate for you if you are comfortable making your own investment decisions. Discount brokers offer you access to fund managers and fund supermarkets. They make their money by (usually) charging a low set up fee and earning trail commission, which is usually 0.5% of the value of your investment. This is paid to them by the fund manager and is covered by the annual management charge (usually 1.5%).

When you use the services of a good financial adviser you are protected as the adviser takes liability for any advice given to you. Using a discount broker does not offer you this protection.

The main benefit of using a discount broker is a reduced initial charge.

Summary

Our view is that certain investors will benefit by using a wrap service to manage their investments, especially if they have different funds in a number of tax wrappers. You have to balance the advantages with the additional cost of using a wrap (typically 0.6% pa), so you should weigh up this option as well as the others and choose the one(s) that will help you achieve your objectives.

Thanks for taking the time to read this series of posts and I wish you luck with choosing the right ISA!