How I chose my ISA

Most people don't know where to begin when it comes to investing.

I am most people.

I read the books, knew (or at least pretended to know) what to look for when investing and knew that I should use a stocks and shares ISA because it provides tax benefits to investing.

The problem: I didn't know which ISA to get.

One caveat before I begin, this article deals with stocks and shares ISAs and not cash ISAs, lifetime ISAs, help to buy ISAs or innovative finance ISAs.

What is an ISA

For those who don't know, an ISA is an "individual savings account" in the UK which allows accountholders to save and invest without paying any tax.

Any person who is tax resident is allowed to have multiple ISAs but is only allowed to pay money into one of each type of ISA per tax year. You are permitted to put up to £20,000 into all of your ISAs in any tax year.

Specifically, it makes all ISA accountholders exempt from income tax on interest and dividend income and on any capital gains in the UK.

I already had a cash ISA (which allows people to save without accruing income tax on the interest income) but I did not know where to go for a stocks and shares ISA.

What did I look for?

In the first instance, I wanted to make sure that I could invest in what I wanted to invest in.

In keeping with the "kanjus" theme of this blog, I also wanted to keep costs down as much as possible. 

What did I want to invest in? and how do I want to invest?

The first question I asked was "what do I want to invest in"? When looking at an ISA this is key as ISAs can restrict your investments.

For instance, Vanguard is one of the cheapest ISA providers. It has a custody fee of 0.15% with no fees for buying or selling shares, transferring the ISA or adding money into the account. 

This counts for naught, however, as I wanted to invest in a variety of funds, ETFs and shares.

The second question I asked myself was "what kind of investor do I want to be"? Whilst this is may feel nebulous to someone beginning as an investor, it is important. My outlook is to invest over the longer term along the lines of growth (a la Peter Lynch) or value (a la Warren Buffett) rather than short term day trading. 

I felt that modern platforms (like eToro or Trading212) were not suited to me as they are targeted at traders. Such platforms are easily accessible on an app and send you push notifications when your shares go up or down meaning there would be the constant encouragement to trade rather than hold shares for a longer time period.

What are the costs? And why is this a problem?

One of the key takeaways from John Bogle's Little Book of Common Sense Investing is that costs can heavily erode your investment returns.

Costs which can erode returns include share dealing costs, custody charges, management fees (where applicable). I wanted to keep these to a minimum so that over the long term any returns I made could be compounded and not face the attrition of high fees.

Which provider did I choose?

I chose Halifax iWeb's service for exactly this reason. The best thing about iWeb is that it is very cheap. There is an initial startup fee of £100 but beyond that there are no custody charges. 

Dealing costs are cheap (only £5 per trade for a fund and a ), there is a foreign exchange fee of 1.5% each way (which is the same as Hargreaves Lansdown, HSBC and other providers).

The service is also simple. There is no app, I can just pay in via my debit card and the website is basic.

The downside is that iWeb only offers shares traded on UK, US and some European markets. On the other hand, it offers lots of funds from a variety of providers which will allow me to invest around the world albeit indirectly. The other downside is that I cannot pay via a bank transfer and if I want to transfer money from my cash ISA I will need to do so as a "partial ISA transfer" which can take a few days.

However, this is, overall a good platform to begin with.

Why didn't I choose another provider?

Mainly this was due to the custody charge and dealing costs.

Hargreaves Lansdown, AJ Bell, HSBC (my main bank) all charge custody fees of up to 0.45% (in the case of Hargreaves) but more commonly 0.25%. HSBC and AJ Bell cap this to below £50 per annum which may not be much but when it comes to compounding such costs have an attritional effect on any returns that you have. Other providers (eg Interactive Investors) charge a flat fee of £10 per month (which is offset by giving you one free trade worth £7.99 per month).

Further, custody charges have to be paid, which comes with logisitical issues that can be annoying. For the sake of simplicity it was just easier to pay a one off fee.

Dealing costs are another expense. Whilst I do not intend to buy and sell shares frequently, other platforms have high charges. For instance, HSBC's "Invest Direct" ISA has a share dealing fee of £10.50 per transaction and a staggering US $29.95 per trade in US-listed shares. Both of these costs are for each trade (ie each time you buy or sell shares) and do not account for any foreign exchange fees. 

All of these costs can add up very quickly and the £5 per trade that iWeb offers is very cheap in comparison.

This is not to knock the other providers. Hargreaves and AJ Bell are leaders in this space for a reason. When I called their customer service teams to ask these questions, they were very quick to answer and were very responsive.

The lesson

The lesson of this is to understand why you are investing, how you think you want to invest and then work out the cost of doing so. Don't just go for the first provider because you like it or it is your bank.

The above is not to knock the other providers of ISAs. They will give you benefits whether it is access to different markets, good customer service, a simple platform or low costs. Just remember, that you are investing for yourself, not because of the marketing that banks or investment platforms may provide you.