Beware hidden cost of hiding your cash in an online investment account

Be alert: Investment platforms are out to make as much profit as possible

Online wealth platforms have transformed the way most of us invest for the future. Whether it is using a tax-friendly Isa, a pension or a share portfolio to build long-term wealth, these vehicles now allow us to take control of all our investments under one roof.

It is do-it-yourself investing at its very best with investors able to keep constant tabs on how their portfolio is progressing – and make changes if necessary.

Yet despite the fact that more than ten million investment accounts have been opened, these platforms – run by firms such as FTSE 100 company Hargreaves Lansdown and Abrdn-owned Interactive Investor – are not in business just to make an investor’s life easier. They are out to make as much profit as possible, which means customers need to keep a sharp eye on fees and charges.

Since interest rates started rising in December 2021, investment platforms have seen a change in the behaviour of many of their customers. Normally, when stock markets are booming, most investors use all of their money to buy stocks and shares. But when markets are volatile, and the outlook for UK plc is more pessimistic, they take fright, sell investments and shelter temporarily in cash, choosing to sit on the sidelines.

Investment platforms have historically made the most of this situation by paying customers underwhelming rates of interest on any cash they leave within their accounts pending reinvestment in the market. They have then used this cash in the money markets to earn a greater return for themselves (the business), driving their profits skywards.

A few days ago, Hargreaves Lansdown, the giant of the investment platform world, highlighted how much this activity can make them. In announcing booming profits of £403million in the year to the end of June (£269million last year), it revealed that the revenue it generated from cash held in customers’ accounts jumped from £50million to £268.7million.

The increase in revenue, Hargreaves said, was a result of ‘increases in the Bank of England base rate during the period and the level of cash held by clients in investment accounts, partially offset by the pass-through rate to clients’. The pass-through rate? This is the amount the platforms pay on cash held in investors’ accounts. Although these rates are not as bad as some of the awful savings rates offered by the banks, they are not particularly customer-friendly.

As the table shows, the rates platforms are paying on cash vary. On Isas, it ranges from zero (Barclays) to 4.35 per cent (Bestinvest). On self-invested personal pensions (Sipps), it ranges from zero (Barclays) to 4.35 per cent (Bestinvest).

This poor treatment of cash holdings has been commonplace for decades, although it was less of a big issue when interest rates were extremely low. But with some easy access accounts now paying 5 per cent – and base rate at 5.25 per cent – the imbalance is clear to see.

If an investor is sitting on cash within an investment platform Isa, they are able to take it out and put it in a standalone savings account paying better interest. But in doing so, they will lose the tax shelter of the Isa. As for pensions, it is a question of biting your lip and taking the cash interest on offer – or investing any surplus cash.

At boringmoney.co.uk, we compare more than 30 investment platforms. One key factor we consider is the current rates of interest paid on cash, which tend to improve the more cash is held. The table analyses the interest paid on cash by eight leading providers. As already indicated, it’s a varied picture, so if anyone is planning to hold a lot of money in cash, it’s worth researching what interest will be paid.

A number of platforms – AJ Bell, Aviva, Hargreaves Lansdown and Interactive Investor – have cash savings hubs which are really easy to use. These are standalone hubs, so annoyingly they are not available to be used for cash held within an Isa or pension.

Once a customer registers, they can switch between the savings accounts on offer via the hub. For example, AJ Bell offers 6.1 per cent fixed for a year in its hub, while Aviva, Hargreaves and Interactive Investor offer 5.9 per cent, 6 per cent and 5.76 per cent, respectively, on a one-year fix.

A parting thought…

This doesn’t seem very fair – and it isn’t. In July this year, City regulator the Financial Conduct Authority gave a warning snarl about the poor rates being paid on cash by wealth platforms.

New rules under the collective heading of ‘consumer duty’ are now in place, to force providers to pay more attention to better client outcomes.

Maybe these rules will at some stage force platforms to pay better rates on cash. Maybe not. For now, the reality is that an investor holding cash inside an Isa or pension on a wealth platform is not getting a great deal. Investor, beware.

• Holly Mackay, is founder and chief executive of investment website boringmoney.co.uk.