As an investment platform, part of our mission is to help you and your clients maximise investment returns whilst minimising costs. Platform fees can impact returns, but in this higher interest environment, you can effectively offset fees through cash holdings within a portfolio. We will explore two examples of how advisers can use cash holdings and low platform fees to reduce fee drag on their client’s portfolio performance.
The P1 Platform charges a fee of 0.15% on the value of the client’s platform account (capped at £1m of assets), but for these examples, we will look at a platform client with £100k in an ISA. The P1 Platform currently pays 3.2% interest (3.35% from 15th August) on cash holdings which is passed straight through to your clients from our custodian bank without deduction.
Client 1: £100,000 Portfolio with a typical 2% Cash Allocation
The platform fee would amount to £150 per year (£100,000 * 0.15%). However, with a 3.2% interest rate on the cash allocation, the client can expect to earn £64 (£2,000 * 3.2%) in interest annually. By deducting this interest earned from the platform fee, the effective platform fee is reduced:
Effective Platform Fee = Platform Fee – Interest Earned on Cash
Effective Platform Fee = £150 – £64 = £86 (0.086%)
Client 2: £100,000 Portfolio with Increased Cash Allocation
Suppose the same client increases their portfolio’s cash allocation to 5% (£5,000). Applying the 0.15% platform fee to the total account value, the platform fee remains at £150 (£100,000 * 0.15%). However, with the increased cash allocation, the client will now earn £160 (£5,000 * 3.2%) in interest annually.
By deducting the interest earned on cash from the platform fee, the effective platform fee becomes:
Effective Platform Fee = £150 – £160 = -£10 (-0.01%!)
THE CLIENT THEREFORE OFFSETS ALL PLATFORM CHARGES AND MAKES £10
Whilst we do not advocate increasing cash holdings simply to offset platform costs, we think it is important to view headline platforms charges along with interest paid on cash holdings, as that provides a better cost comparison when assessing one platform against another.