As a business, one of the most common questions we’re asked is how it’s possible for us to provide our highly-rated free service. We charge absolutely no fees on our DIY portfolios, meaning our clients can invest in our huge range of best-in-class ETFs without paying us a penny.
For some people, this appears too good to be true. This is why we think it’s important to explain how our business works and why, ultimately, it’s possible to make things cheaper for the customer and still build a profitable business.
From internal efficiencies to powerful automation, here’s how we keep the end user costs so low at InvestEngine.
How our service can be fee-free
The primary reason we’re able to operate such a low cost service is that we choose to keep costs low on the business side. Our entire investment philosophy is based on long-term, efficient investing with a view to keeping costs down.
Our trading is all done within a single aggregated window. This means that our DIY platform allows customers to place orders until 2pm each business day, after which we combine the orders for that ETF and invest them all at once. This process is important in keeping costs down and, given our long-term approach to investing, shouldn’t notably affect investor returns.
We also tend to avoid expensive, traditional marketing approaches. Instead, we’ve worked hard to build relationships with partners that have helped to grow the InvestEngine brand. We’ve also supported ‘word-of-mouth’ initiatives like referral schemes, rewarding our clients for sharing a platform they love.
Finally (and importantly) a lot of what we do is automated. Modern investing is such that a great deal can be done without human intervention, with our experts steering the process rather than managing the minutiae. This is another significant way we reduce our costs while providing a top-tier service.
Our revenue comes from elsewhere
So, if we don’t charge fees on our DIY portfolios, where does the revenue come from? It’s a question we’re asked a lot. The reality is that there are a number of other avenues we can go down to monetise our platform, meaning that we absolutely do not need to charge any hidden fees or take advantage of our investors in any way.
It’s worth considering the fact that even traditional brokerages will typically only make a portion of their revenues from direct commission. There are other avenues of monetisation – like premium services – that can be more effective and better for the client than simply charging customers to use the platform’s basic functions.
We do offer managed portfolios. For 0.25% a year, our customers can have their portfolios overseen by our team of investment experts. We’ll also soon be offering paid features like advanced analytics on the platform – to be clear, we will not be sacrificing any of the functionality that investors currently have access to on free accounts. Similarly, our next major project for the platforms, SIPPs, will be fee-paying accounts.
In some ways, our business model is similar to that of modern digital banks. The service itself is free to use, with a number of additional features (including portfolio management) available to those that want them.
We also generate revenue from the uninvested cash held in our portfolios. We aggregate the cash on the platform and retain the interest given by the bank. This is fairly common practice for wealth management platforms and the cash itself is completely secure – the interest generated simply allows us to continue our free service.
We can also explore and establish partnerships with other businesses that have shared interests – not relying too heavily on commission allows us to focus our efforts elsewhere.
Why we think it’s important to offer a free service
There are a few reasons we think it’s important to be able to offer a free service. Firstly, it suits our philosophy of long-term investing; we want anyone to be able to invest with us for years, whether they can afford to pay fees or not.
It’s also great for our clients. In a time of hidden fees and rising costs, we think the simplicity of a fee-free structure is a welcome addition to the industry, particularly given how much high fees can erode returns.
We’re also not incentivised to take advantage of our customers – traditional brokerages, for example, make revenue from trading commission and have a vested interest in their customers buying and selling. We want our customers to take a long-term view, which means no unnecessary inducements to trade.