Sales of Individual Savings Accounts (ISAs) have never been big money spinners for advisers. Usually they are just one element of a wider, more holistic look at a client’s finances. For the past three years they have appeared more marginal than ever with most savers turning to the safety of mini-cash ISAs. But that could be about to change.

According to figures from the Investment Management Association, net sales of fund-based ISAs experienced a sharp year-on-year increase from £39m in January 2005 to £82m in January this year.

Some fund management firms have woken up to the sudden interest among savers and wheeled out further inducements to keep savers happy. Others have decided, after three lean years, to increase fees and profits.

Support for ISA sales from fund managers comes in several guises. There are discounts on initial charges and management fees. Advertising and promotional literature can also help the less sophisticated investor make up their mind.

Articles in the Financial Times and elsewhere argue that the rise of ‘free-to-use’ online sites, the popularity of ‘free’ mobile phones when signing up to annual deals, and the Primark effect on the high street will have a knock-on effect in financial services with profits made at the back end and not the front. It’s something insurers experienced with stakeholder pensions.

The government understood that few people would invest in stakeholder products unless front-end charges appeared to be low. But even a 1% charge was a disincentive and the scheme floundered.

When the insurance industry campaigned for higher front-end charges, it was derided. In a vain hope to appease the industry and generate a few more sales, ministers caved in. But the politicians knew the trend was going the other way. High front-end charges are a turn off.

Where ministers have turned out to be wrong, however, is that clients are prepared to accept high exit charges to gain low entry fees. It is a mirror image of the mortgage market where more homebuyers are prepared to accept penalty fees for the lowest introductory interest rate.

F&C Asset Management, a provider of investment trust and OEIC-based ISAs, is one of a growing band (along with Perpetual, M&G and Merrill Lynch) to maintain 0% initial charges.

While there might be a temptation to raise fees, when sales figures indicate investors have a growing appetite taking up their full £7,000 maxi ISA allocation, the company is resolute against any jump in fees.

In the case of most OEIC-based ISAs, including F&C’s plan, there are no additional charges to pay on top of the underlying fund costs. Investment trust-based ISAs will usually carry a plan management fee, but in the case of F &C’s investment trust, ISA initial charges have been abolished and investors pay a flat fee of £60 plus VAT.
To the retail investor there is a discount of 1% from its 5% initial charges for F&C’s multi-manager funds, its popular ethical vehicle, the Stewardship Fund, and the F&C UK Opportunities fund. ‘Advisers can also attend our roadshows, which give details of our multi-manager products,’ says Jason Hollands, the firm’s head of communications.

M&G stresses that the price punters pay for waiving initial charges is likely to be exit fees. According to the company, it is a price many customers are willing to pay. Fidelity, on the other hand, was among several firms to increase charges, most noticeably on its flagship Special Situations fund to 5.25%.

Fidelity argues advisers should not let the Special Situations Fund distract them from cuts in fees on other products such as its multi-manager and Wealthbuilder products. It argues the fee rise on Special Situations was just that, a special situation. Jupiter has met with criticism for increasing initial charges to 6% on reinvested dividends. Threadneedle and Credit Suisse Asset Management have kept charges in place.

The average initial fee is about 3%, but 5% is not uncommon. Probably to capitalise on a return to the market by investors, management fees have also been creeping up. Financial advisers will want to knock that fee down to match the larger financial advice houses, which typically offer investments free of initial charges and discounts on management fees.

Cutting down on charges

Advisers are coming under increasing pressure to refund some or all of their commission and trail fees.

Smith & Williamson says it has spent the past couple of years wrestling with these issues. Peter Lowe, a director in the firm’s investment arm, says his clients focus on keeping costs down.

The size of the firm has allowed him to negotiate special deals with many of the fund management groups and cut initial charges to 0% and reduce annual management charges. With online dealing services and larger financial advice groups offering this as a matter of course, fee cuts are essential.

He also wants fund managers to let him buy institutional units rather than retail units. It can mean a cut in ongoing management charges. 'M&G is considering allowing us to do it,' he says.

The question of commission and trail fees is just as problematic. Lowe says he will negotiate a better rate for clients with larger fund sizes ­ usually more than £100,000.

He says clients will accept paying dealing charges rather than commission and trail fees. 'They know us and they know we are not going to start racking up huge dealing charges,' he says.