The cost of turning over stocks within portfolios underpinning SIPPs and self-select ISAs could beco...
The cost of turning over stocks within portfolios underpinning SIPPs and self-select ISAs could become prohibitive if the suitability requirements currently being discussed in Brussels were applied to execution-only services warns IFA Inter-Alliance.
As previously reported by IFAonline the Investment Services Directive in particular is causing concern to many financial services associations and representative organisations on precisely this point.
Although the European Parliament's Economic and Monetary Affairs Committee has repeatedly delayed its final vote on amendments affecting suitability, there is no guarantee yet that execution-only services – which are far more prevalent in the UK than on the Continent – will be given a reprieve from the new rules.
Inter-Alliance says there are no hard and fast numbers yet available to calculate the true cost of additional fact-finds that would be the result of stricter regulations.
However, a rule-of-thumb calculation relevant to self-select ISAs illustrates the scale of the problem.
A maxi-ISA would enable up to £7,000 to be invested in any fiscal year, but assuming that existing trading costs of, say, £10 per stock traded were doubled by the need to ascertain suitability each time a trade took place, and assuming that stocks are turned over, say, 15 times in the year, then dealing costs alone would hit £300.
Add inflation of, say, 3% and an annual administration cost of, say, 1% to the more than 4% trading cost, and suddenly an investor finds himself facing the need to earn a return of more than 8% just to retain the value of the original capital.
Inter-Alliance says it is concerned by the negotiations over suitability because investors in the UK already face costs that people on the Continent do not, such as stamp duty.
Other European issues are seen in a more beneficial light, however, especially UCITS III, which Inter-Alliance characterises as "exciting".
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