Portfolio sized ISA Pricing

That was taken from the last crowdfunding raise

We wait and see the perks for the next round…

As Emma says, Alpha has disappeared from Freetrades website :man_shrugging:

Benefitting from an ISA depends on how much you intend to invest. If you’re going to invest large sums that will bring you £11k+ annually in capital gains, or over £2k/year in dividends, then it’s the right route to go. Even if you invest the full £20k allowance annually it’ll take you a few years to reach those limits (if you’re lucky).

I think most people who are saving just a few hundred a month don’t need an ISA. I do think this will be the majority of Freetrades users.

“I will say that for people investing less than £75 a month, an ISA probably isn’t worth it.”

  • £75 a month is £1000 a year. An ISA certainly isn’t worth it.

  • £200 a month is £2400 a year. Assuming a person put that amount in consistently, and made a 5% gain every year, they would have around £30k after a decade. Even then, I doubt they would be at a point whereby getting £11k+/ year in capital gains or over £2k/ year in dividends is realistic.

The threshold whereby a person would benefit from an ISA is much higher than that.

You’re assuming they have no other capital gains or dividends, and never want to sell in a hurry. Both things are quite common. I agree there is a threshold where ISAs start to make sense but it’s hard to say where that is - it varies with individual circumstances and if the threshold for dividend taxes or cgt change.

I think in earlier rounds it was lower.

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We removed it because it hasn’t launched yet. Increasing numbers of new people visit the website, and we want to make sure they get accurate information.

We’re on it! :wink:

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I don’t have access to their user numbers and stats, nor costs of business to be able to say. I recall they did post a nice graph of ISA accounts increasing or something.
I imagine their long term viability will be possible to guesstimate when they release more details for their next crowdfunding round.
I hope they’re viable, and want them to be the best investment platform for the majority of people. I think they’ll need that pricing tweak to achieve this.

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Problem with that is the variability and the fact that they might pay quarterly or less frequently. You can spend about £702 to get 600 shares of FCPT, which will give you £3 every month. (dividend yield of 5.1%)

(Their dividends have been constant for a very long time, and they pay monthly, but as ever, past performance is not a guarantee of future returns.)

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This seems like a much better approach - even if the starting value were to be lower it would work well.

I appreciate that opinions are strong on this and understand why people are shying away from using the ISA wrapper - but I remain thinking that the limit of making the ISA ‘worth it’ isn’t very far above 1000. Consider the following examples:

  • we have another 60% reduction in dividend tax allowance and your income is suddenly taxable.
  • CGT rates are changed again and anything over 1000 is suddenly taxable.

I don’t think either of these scenarios are completely out of question, especially under a Labour government that will likely target additional incomes. So I guess the basic argument here is that you will simply then use the ISA wrapper as its likely these changes would be given ahead of time and you would have enough notice - for the people on this forum I think that is likely, but I highly doubt the average Jane & Joe Bloggs will be aware of those changes.

However, imagine ISA contribution limits are reduced over a few years and you’re still in a position of thinking that you don’t need the wrapper. Then, CGT and Dividend Tax changes and you need to move to the ISA wrapper - but your portfolio is above the new ISA contribution limit - what action do you take then? How do you protect your investment in this scenario?

I don’t mean to pick at specific examples here, I simply mean that making assumptions based on Government rules today opens the possibilities of future issues. The ISA Tax wrapper is a convenient and easy way of mitigating these scenarios now - and again, is inline with successive government policy of ‘if you don’t want us to touch your money, use the ISA wrapper’. Your ISA allowance does not rollover and because you either use it or lose it, you’re losing your future protection at the same time. No court in the UK would allow any government to make retrospective changes to ISA limits and tax policy.

For what its worth, I’m saying all of this because I’ve just been caught out in an investment area that has very little in the way of Tax protection - Buy to Let. My returns remain positive and profitable but recent changes have made this borderline un-investable now.

A final scenario I’d like everyone to consider here is this. Freetrade as a new business is unable to remain trading in 15 months time. Your assets are moved to a new provider and you’r now subject to their T&C’s of trading - for example lets say Hargreaves Lansdown. Now to liquidate your assets you will have to spend 11.95 per asset to sell - how does this impact your returns?

@kenny & HenryL have just suggested an interesting example, I think a ‘free allowance’ within the ISA is a terrific idea. However I disagree on the amount, I think that 1000 is both fair and reasonable. This allows a user to save 1000 and generate enough portfolio income to cover the costs & allowing for long term inflation as well. @Antidev made a great point around ‘incentivizing’ new and younger savers and I think this free allowance does this adequately whilst ensuring that we all have a profitable business to work with on our savings & investments.

@sendu your idea of 0.15% capped at 3 is a nice idea - theoretically this works & I’m supportive of this. But I think scale is the issue here - eg, Freetrade would need massive scale to get this to work.

I respect everybody’s opinion on this and I totally undertand that the current structure could negatively impact your short term returns. As a qualified (but not practicing or licensed) Financial & Mortgage Advisor I honestly don’t view the current structure as anything but a huge positive for the vast majority of people - micro investors aside.

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Both of your arguments are addressed by the fact that Freetrade has competition. If you have concerns about future ISA rules, you get an ISA now with a cheaper competitor. If you’re with a competitor, you don’t care if Freetrade goes bankrupt.

It is not about your personal conception of what might be “fair and reasonable”. It is about what is competitive in the marketplace of investment platforms. If another platform is still cheaper for a certain person despite a £1000 “allowance”, that person will not be a Freetrade customer.

For a new investment platform to succeed, they need to be competitive. Both the Freetrade GIA and ISA are already highly competitive, and the best choice for many possible customers. But with improved pricing, they could be the best choice for even more possible customers. And in my imagining, could be even more profitable to boot.

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With a GIA users can earn £11k/year in capital gains and £2k/year in dividends without paying tax. That’s pretty generous and I doubt the vast majority of users are anywhere near those limits. Sure, the limits on ISAs might change one day but right now a GIA will be fine for most users.

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yes I’d be fine with £1000, just seems weird to charge £3 a month on low deposits when people are starting out and I suspect freetrade will lose out in comparisons as a result.

The low flat fee is what I love most about freetrade.

I’m not going to restate previous comments. I’ll simply say that if anybody is making a ISA vs non-ISA judgement call based on the state of tax policy as it stands today, then they’re missing the whole point of the ISA wrapper. Its about protecting your future self, not your current self.

@sendu agreed on your competition argument, apologies if I’d missed that before. I’m not aware that Freetrade really has any direct competition as it stands today though? Indirect sure, Vanguard, Trading212 or DeGiro? I’d argue they’re slightly different value propositions though. However, I take your point on competition, this is likely to be the driving force behind this fee structure changing.

@kenny thanks & I totally agree on this “The low flat fee is what I love most about freetrade”. I very much doubt you’re alone there either.

I opposition to this thread is honestly made from experience. I’ve been burned, badly, twice by poor (or lack of) tax planning - I’m simply trying to avoid anybody making the same mistake as I have done. If you disagree with any or all my arguments and you think that the current ISA arrangements are not right for you then I support your choice and hope you have a productive investment career :slight_smile:

For any new investors reading this - please consider your future self rather than your short term rewards or gains - especially as you can’t predict the future tax rules. Keeping your long term savings and income away from Mr Taxman is no longer very difficult - a few £ a month now could save you an awful lot more in the future.

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Not sure what you mean by “direct” vs “indirect”. I’d consider all the established investment platforms to be direct competitors?

For example, if you want an ISA, and plan to invest £1000 as a lump sum each year, with iWeb there’s a £25 account opening fee, plus £5 to buy your investment. Year 1 costs £30, years 2+ cost £5. Compared to £36/yr with Freetrade. After the first year, Freetrade is £31/year more expensive for this user.

Or if you want an ISA, and plan to regularly invest £84/month in the same ETF (and I believe this kind of scenario to be what the vast majority of investors should want to do), with Halifax share dealing it costs £12.50/yr for the account, £12.50 for the initial buy, then £2 each subsequent month. So £47 in the first year, then £36.50 in subsequent years. Here Freetrade is £0.50/year cheaper, but lacks many essential and basic features compared to Halifax. Halifax also offers more choices of what to invest in.

Or how about the same scenario with what many would consider to be the most expensive platform out there: Hargreaves Lansdown? If you could find a fund similar to the ETF you were thinking of, then HL would charge you just £4.50/yr! Making Freetrade £31.50/yr more expensive than HL. (Admittedly, this isn’t an apples-to-apples comparison.)

Finally, the number one most recommended investment platform for regular long-term investors would be Vanguard Investor. Yes, they only offer their own funds and ETFs, but if you’re following the wisdom of many, you’re going to want one of their funds or ETFs anyway. In which case both users above, the lump sum and regular investor managing £1000/yr, are going to pay just £1.50/year, making Freetrade £34.50/yr more expensive.

As it stands, Vanguard Investor is a better deal until you hit £24,000 in investments. To be the platform that everyone recommends without any reservations to the majority of new investors, Freetrade would have to do something like match Vanguard’s 0.15%, but also cap to remain cheaper on balance than the fixed-price platforms like Halifax Sharedealing or iWeb. Hence my 0.15%;cap£3/month suggestion.

I say this because, as far as I can tell, Freetrade do not have any significant competitive advantages over other platforms, other than price. (I only know of significant disadvantages due to missing features.) So if price is their USP (and it’s in their name), they ought to go all-in on making their price the absolute best.

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They have to make money somewhere. If they go all and be the market leader in every aspect at this stage it doesn’t make good business sense.
I’m sure they’re constantly looking at the figures and will change things if it’s needed. Until then people can use it if they want and don’t use it if they think price of the isa is the only thing to consider

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Surely it would make more money to charge on a sliding scale? Those users who may go with the free GIA would be much more likely to choose the ISA if the cost was lower to start with…

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Maybe but for the time being while freetrade scale their offering there may be additional costs their end to deal with an isa account than a standard gia so actually let’s just see how freetrade evolve.

They aren’t going to match all of the features and costs of others over night (if ever for some features) so personally this is one to resolve in the future.

I’m not a fan of sliding scales. A basic ‘this is what everyone pays’ is so much easier to understand

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Even if that’s many thousand percent more than competitors? If a prospective investor can’t understand a price scaling then they probably shouldn’t be investing!

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