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Brokers failing to pass on interest rates while making a mint off investors’ cash

Money
Money

Britain's biggest investment brokers have been accused of pocketing savings interest earned on investors' cash and failing to pass it on to customers.

Hargreaves Lansdown made £121.6m in interest on cash held in investment accounts, as customers piled £14.5bn into cash reserves in the last six months of 2022, its biannual report showed last week. It allowed investors to keep between 1pc and 2pc of their own interest, but creamed off 1.68pc for itself.

Its rival AJ Bell works in a similar way, receiving between 3.9pc and 4.15pc in interest from its custodian bank. But it only pays investors between 0.85pc and 1.35pc, The Telegraph has learnt.

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Brokers are generating huge revenues from cash, yet only some listed firms reveal exactly how much they make, meaning many investors are in the dark. The platform Vanguard says it keeps 0.2pc of interest it earns from customers' cash holdings. Barclays Smart Investor and Halifax Share Dealing both pay 0pc in interest on their customers' cash balances, while rival Charles Stanley Direct did not confirm its arrangements.

It means investors are missing out on millions of pounds worth of interest paid on their cash balances, as their stockbrokers fail to pass on rising interest rates in full. 

Justin Modray of the adviser Candid Financial Advice said rising interest rates were “music to the ears” of brokers, as they allow them to “earn more on customer cash balances than they pay out as interest”. “For larger platforms, this can boost profits by many millions,” he said. He called for brokers to pass on all the interest they earn on investor cash balances to their customers, saying the creaming off of interest amounted to a “stealth charge”.

“They’re an administration service, so their only revenue should be customer fees and not stealth charges like this,” he added.

The practice of creaming off interest from customers is widespread, but it comes as investors are holding more money in cash in response to choppy markets in 2022. Hargreaves Lansdown customers piled £14.5bn into cash in the last six months of 2022, up £1.7bn on the same period a year previously. Year-on-year, the proportion of investors’ assets held in cash with Bestinvest, another broker, has risen from 9.3pc to 10pc.

Investors will normally increase their cash holdings as a temporary measure when markets dip, with a mind to deploy the funds quickly when buying opportunities emerge.

Consecutive rises to the Bank of England’s rate mean brokers are now making serious money on their customers’ growing cash reserves.

In line with the Bank Rate rise, brokers have been increasing how much they pay investors. Come March, AJ Bell will have raised rates six times in the last year and Interactive Investor, another broker, five times.

But the rates on offer by many are still paltry – especially for those with smaller portfolios.

The Telegraph found there was a 3.1 percentage point difference in how much platforms paid their investors – working out at a £155 loss for an investor with £5,000 in cash – with some platforms paying nothing at all. By comparison, the top rate on easy-access savings account today is 3.15pc.

Cash serves a vital role in any investor's portfolio.

Jason Hollands of Bestinvest, one of the only investment brokers to pay on cash savings interest to customers in full, said: “As part of their broader financial plans it is very wise to have a cash war chest that can be used for short-term needs, unexpected costs and should they find themselves in the position that they cannot work for a period of time. As a general rule of thumb, I think having enough cash to cover your living costs for at least six months makes sense.”

However, savers should be wary of holding large amounts in cash for the long-term. The financial regulator believes savers are holding too much cash. Late last year the Financial Conduct Authority outlined proposals to reduce the number of savers with £10,000 or more in cash by 20pc by 2025, fearful that savers are missing out on opportunities to grow their wealth.

A spokesman for AJ Bell said: “Cash held in our investment accounts is available to customers to purchase investments immediately, making it more akin to instant-access current accounts than savings accounts. For customers looking for a cash savings account we offer a cash savings hub which pays up to 4.2pc.”

A spokesman for Hargreaves Lansdown said: “[Our] cash accounts have always been interest bearing and after more than fourteen years of being in the doldrums, interest rates have now normalised which has enabled us to pass more interest onto clients.

“We take an active approach, we tell clients when they are holding too much cash for too long, and encourage them to use our Active Savings service – the largest cash savings platform in the UK. At the moment people can get 4pc with this service.”

Richard Wilson, CEO of Interactive Investor, said: “We are fully aware of the long-term impact of cash drag on portfolios, and are also trying to help our customers be better investors. We have been offering free regular investing for funds, investment trusts, ETFs and popular UK shares for the past 3 years, and our new subscription plan, Investor Essentials, has been designed with regular investors front and centre.”

A spokesman for Barclays said: “We don’t pay interest on cash held in ISAs and SIPPs but Barclays offers a range of fully flexible Cash ISAs which customers can transfer their money over to, without losing any of the tax-free benefits, if they decide they’d prefer to keep their money in cash rather than have it invested.”