Hargreaves Landsdown (HL) Stocks and Shares ISA Review

Overall I find that you can't go far wrong with Hargreaves Landsdown. Their charges are not unreasonable, their service cannot be faulted and their research is second to none. I suspect that experienced investors can find better deals but at the cost of the support and extra services HL provides clients with.  At HL you get what you pay for and for that you get quite a lot.

HL Homepage

As you can see I have a generally positive opinion of HL. The only reason that I no longer have an account with them is that I work almost entirely with hard numbers and spreadsheets. HL is not the cheapest provider but it's still very good value.

The Good

• The charges for ETF's, shares and bonds are capped. So if you have a big portfolio the charges are small in relation to your portfolio. 
• The level of service is exceptional
• The company is well run and has a good culture. For example the company does not borrow money so it's future is pretty safe. 
• The company is well established with a lot of investment experience. It is also a constituent of the FTSE 100 index. 
• They offer various other services such as a cash ISA, SIPP and currency service. 
• They have occasionally offered £1 per trade promotions to new customers. 

The Not so Good

• The "platform fees" for index funds and money market funds make investing in them pointless. I think this is intentional.
• You can find providers without an annual management charge which makes HL less attractive

Research

With regards to research no-one comes close to them. HL excels at helping clients to make informed investment decisions. However, most of this great information is freely available so although I am no longer a client I have been using their research extensively.

The two main research products produced by HL are their in-house magazine, The Investment Times and their internet TV program Investor Insight (or HLTV). If you choose HL be sure to have The Investment Times delivered to your door.

  

Index funds and Platform Fees

For those looking to invest entirely in index funds I would not recommend HL. They charge a monthly "platform fee" which makes indexing far more expensive. At present investing in a Vanguard fund will cost you £24 per year before vanguard's charges.

How to Transfer A Stocks and Shares ISA

Transferring and ISA has never been easier. The ISA transfer forms that I have filled in run to a total of 2 pages. I strongly advise that intelligent investors transfer their ISAs as much as they can get away with. If you don't like something about your provider just transfer to another. Let them fight it out. 

"In Investing you get what you don't pay for" - Jack Bogle 

When thinking about transfering an ISA you have to remember one golden rule: 

"NEVER TAKE MONEY OUT OF AN ISA"

The second you withdraw it from the ISA it's lost its tax advantages. If you take £11,500 out of an ISA and put it into another you can't add any more this tax year. Imagine if you took out £50,000 of the ISA wrapper it would take you 5 years to put it back in. However you can transfer that £11,500 and then pay another £11,500 in as the two are from different tax years.

There are two main ways that you can transfer an ISA without breaking the tax wrapper. The options are to transfer as cash or as stock. Which one you should choose depends on your investments and ISA provider.

Cash Transfer

This is the simplest and fastest way to move an investment. To do a cash transfer you need to:

1. Sell all your existing investments (you will have to pay brokerage fees)
2. Get a transfer form from you new provider 
3. Fill it in and send it off 

Also, ask your new provider if they are willing to refund your brokerage fees. Sometimes you can get away with it... 

Stock Transfer 

This allows you to keep all your existing holdings. Some providers offer a transfer in scheme where they will pay the costs of your transfer but they do come with attached terms and conditions so make sure you read the fine print. 

The process for a stock transfer is similar to the cash transfer. All you need to do is: 

1. Get a transfer form from you new provider
2. Fill it in and sent it to them
3. Your old provider will probably contact you so that you can confirm the transfer - confirm it and agree to the charges. 

A stock transfer is much slower than a cash transfer and can take around 6 weeks. 

What Investments Can You Put into your ISA?

ISA's permit quite a wide range of investments and allow you to gain exposure to a various markets and asset classes. The range available to you depends on which provider you choose (i.e. not all offer a stock brokering service). I've collected the main investment types with and provided a small comment on each of them.

Shares 

As you probably know shares represent an ownership interest in a company. Generally speaking if a company does well (increases profits) the shares go up in value and if something goes wrong in the company their value will go down. An owner of these shares in entitled to a dividend if one is declared by the company's directors. These dividends can be used to buy more shares. If you are skilful and pick the right companies the value of your ISA will increase over time and you'll receive a rising cash payout from your shares.

It is possible to get very good returns by picking and choosing stocks but it is very difficult. I would not advise most people to do it.

Index Funds/ETF's

In my opinion this is the single best investment for the vast majority of retail investors (i.e. normal people). Instead of picking and choosing shares or paying a fund to choose for you; you simply buy everything. For example when you buy shares in an FTSE 100 ETF you simply track the performance of the index and recive a share off all the dividends paid by the index's constituents (Shell, BP, Unilever, Glaxo, Tesco, Imperial Tobacco etc).

The advantages of index funds are:

• Significant diversification (some funds have over 2000 holdings)
• Very low cost (Vanganguard has funds for around than 0.1% TER)
• Beat most actively managed funds consistently.

Investment Funds (Actively Managed)

This is the most popular investment held in ISA's by a long way. Every ISA provider I have looked at actively wants to sell these.

I don't like these one bit. I find them to be very expensive and often under perform the market significantly. I'm in the minority in this one but I recommend you do your research before you come to agree with me.

However, they do have one use. These can be used as a place to park cash as you are waiting to build up enough money to place a trade. For example you can't pay £10 to make a £100 investment as you'll start off down 10%.

Investment Trusts

These are like investment funds but are listed on the London Stock Exchange. They are often less expensive than actively managed but should still be approached with caution. You should closely study the balance sheet of the trust and know exactly what the management fees are before investing.

For example investment trusts are able to borrow money from banks to leverage their returns. This can often boost returns but some trusts have got horribly in debt. The first metric you should look at is net asset value (also known as book value). If it's negative be afraid... very afraid....

Bonds 

These are loans to companies that can be bought and sold on the market. These are far less volatile than stocks and should make up a proportion of virtually every portfolio. You should own lots of bonds if you are approaching retirement.

It is important to note that during the finantial crash people with only stocks got hit hard whereas people with portfolios of stocks and bonds did OK.

REITs (Real Estate Investment Trusts)

These are listed companies which own portfolios of property. Most of the listed REITs own commercial property but some also own residential property. Some of the big names include: Segro, British Land, Hammerson and Intu Properties PLC.

REITs are a very good idea for the income investor as they produce a nice steady income from rent and they are required to pay out 90% of their profits to keep their special tax status.

More very good information on REITS can be found at Reita.

Stocks and Shares ISA FAQ

I have collected together various different questions that people commonly ask about ISA's. Some of these have been answered in an entire post which I will link to.

Can I trade derivatives in an ISA? 

Probably not. I've never found anything to explicitly say that you can't but I've never found a provider which offers derivatives within an ISA wrapper. 

Also derivatives are high risk and are only suitable for the most sophisticated investors. 

What's the difference between a PEP and an ISA? 

What can you buy in an ISA? 

You can invest in managed funds, investment trusts, RETIS, shares, bonds, preference shares and gilts. 

Can you buy AIM shares in an ISA? 

At the moment no. But there is talk about them being allowed in future so we'll just have to wait and see. 

Can you use an ISA for trading? 

Yes. There are no limits to the number of trades that can be placed within an ISA and all profits can be taken without tax.

However, dealing commissions for ISA investors are quite high compared to other brokers so you may find it hard to overcome costs when trading. Frequent trader rates are usually available but only after you've paid over £100 or so in commission to the broker in one month. 

Who can open an ISA?

ISA's are open to anyone who is a UK resident and is over the age of 18. 

Does it cost to have an ISA?

This depends on your provider and what you invest in. Some ISAs will be free if you invest in funds where the manager earns commission. However, if you invest in shares you will have to pay dealing commissions and sometimes a management charge/holding fee.  

Do you have to declare income and profits to HMRC? 

Since there is never any tax to pay on ISA gains there is no need to declare them 

What is a Stocks and Shares ISA and Why Invest in One?

A Stocks and Shares ISA (Individual Savings Account) is what is known as a "tax wrapper". It acts as a shield between your money and the tax man - unless you let your money out the tax man can't get at it. This means that you can escape capital gains tax and most of the tax on dividends (10% is deducted at source).  This can seriously boost your investment performance.

Within an ISA you can invest in various different asset classes and build your wealth effectively over time.

Why Invest Within an ISA?

Frankly until you've used up your ISA allowance there is no excuse for investing anywhere else (with the possible exception of VCT's or Enterprise Investment Schemes). If you own shares outside of an ISA and you haven't used up your allowance then you should definitely consider a Bed and ISA (a simple way to transfer them in).

The top three benefits of using an ISA are:

1. No capital gains tax to pay
2. Lower taxes on dividends 
3. No need to declare holdings or income on your tax return. 

The benefits of investing without having to worry about tax are significant. Say you invested £10,000 for 20 years which didn't pay a dividend but returned an average of 10% per year compounding. At the end of that period you could sell it for: 

• £67,250 in an ISA 
• Up to 59,060* 

So using an ISA has saved you at least £8,000 which I think is justification enough for their importance. However, you can't claim losses on investments in an ISA as a tax loss. 

*Assuming you use your full allowance are and on the 18% CGT rate (2013-2014 tax year).