Freetrade – A Look At The Fee Free Share Dealing Platform 5

Rip-off Britain. Nowhere is this statement more true than in the world of finance and investing. We as the public are getting fleeced by the stock-broking world. The average price we pay per deal is £10 which is crazy. For a buy and hold investor like me who only makes about 15 trades a year, dealing fees add up to £150 per annum. And considering I have a good 40 years of being an investor ahead of me, total dealing fees balloon to £6,000. And if you think that is bad, have a look at this. If all I did was put the £150 a year spent on fees in a plain vanilla index fund earning the historical average of 8% per annum, I would end up with a whopping £41,967! Fees are really a detriment to financial success.

So when I heard Freetrade were introducing the UK’s first fee free stock brokerage platform, I was ecstatic. It was essentially like getting £41,967 for free! So I have got in touch with the good people at Freetrade to find out more about the UKs cheapest share dealing platform. Below is my write-up on what I have gathered so far about the new platform.

What Is Freetrade?

Freetrade is a new online share dealing platform that will allow users to execute trades with zero dealing costs. It’s aim is to revolutionise the stockbroking industry and make it easier for everyday people to buy and sell shares.

How Does Freetrade Work?

With Freetrade executing trades for free via the basic dealing service, the trades will be conducted in bulk at a given time of the day in order to keep the costs down.

For example, if I want to buy shares in BP at the market rate, I would place a (market) buy order and this trade would execute at a specific point in the day when Freetrade is buying BP shares for all other account holders.

Likewise, if I wanted to sell shares in BP, it would be done at some specific point in the day.

For those that execute trades via limit orders, Freetrade will have this function as well. In this case, a share trade will execute if the market price equals the limit price you set.

The bulk order process is nothing new and is a practice many other reputable investment firms do, including Vanguard and Stockpile.

(Users will also have the option to pay for live execution, which will be a very small flat fee.)

What Accounts Do Freetrade have? Do They Offer Tax Sheltered Accounts?

Freetrade will have three different account types:

  • Basic Account: The basic account will be free forever with no account minimums. The basic account is akin to a share dealing account you see at most other brokerage platforms but without the fees.
  • ISA Account:  The ISA is a way for investors to grow their money completely tax free – no tax on dividends and no tax on capital gains. The charge for an ISA account is £3 per month. Again dealing in this account will be completely free.
  • SIPP Account: A SIPP (Pension) account will be rolled out after the basic and ISA accounts.

What Markets and Assets Can You Trade in Via Freetrade?

Freetrade will have the most popular stocks and ETFs on major UK and US exchanges. The platform will also enable users to purchase American Depositary Receipts (ADRs) listed on the US markets, meaning users we’ll be able to trade a number of European and Asian companies, too.

Freetrade’s plan is to start with an an optimised number of available securities, and they will enhance the offering based on user feedback and data, similar to how Robinhood started off. I as a registered member of the invite list recently received an email asking if I plan to invest in Chinese companies with Freetrade? It is great to see a company asking for my opinion and tailoring its offering for its users needs!

When Will Freetrade be launching?

Freetrade is expected to launch at the end of this year or beginning of next year.

The exact dates cannot be given at this time as the company is still waiting for authorisation from the FCA. The application with the FCA relates to Freetrade becoming a directly authorised stockbroker. This means that should authorisation come through, Freetrade will have direct relationship with the users , with no layers of intermediation between them. This in turn will keep brokerage cost low which benefits people like me and you.

When Freetrade launches, it will initially be via a private invite-only roll out. So if you want to be one of the first users of the product, head over to the Freetrade site and register your email address!

One more point to add is that the initial launch will be for iOS only (Apple iPhones). The Freetrade app will come to Android after this with expectations of launch in early 2018.

What Should Interested Members Do In the Meantime

As Freetrade are taking waiting list approach, the best thing to do is to go and register your interest at Freetrade’s website by simply entering your email address. If you want to jump the wait list and be one of the first people to get the app, start sending out invites for people to join. The more people you invite, the higher up the queue you go.

Advantages of using Freetrade.

There are a number of advantages we feel strongly about, the highlights are:

  • The biggest advantage is free dealing offering. Not having to pay commission for buying or selling shares will save a lot of money and enhance returns as seen by my opening paragraph.
  • The product is a mobile app that makes investing natural and accessible. Current solutions in the UK feel bloated, unusable and business-minded. From what I understand, Freetrade are building something that feels clean, crisp and like a tech company.
  • Building a diversified portfolio with small amounts. I personally know many people who want a diversified portfolio but don’t have the sufficient funds at present to make the numerous purchases required worthwhile. Freetrade will be ideal for people in this situation as there are no trading fees, no minimums and provides the opportunity to trade in fractional shares. Younger more cash-strapped investors will be particular beneficiaries on this point.

What is investing in Fractional Shares?

A fractional share is any amount less than one whole share, such as 0.50 or 3.20 shares. At first glance fractional shares might sound silly as who would want to own half a share right. But being able to buy fractional shares gives you as an investor two big advantages:

  1. Be able to gain an ownership stake in companies that have a high price per share. For example, one company that I have always wanted to buy due to its strong cash flows, high returns on capital and favourable growth rates is Lindt and Sprungli, the maker of Lindt and other branded chocolates. The problem is, the price per share of Lindt’s on the Swiss exchange is CHF 67,410 and the ADR is $5,600. This is way too high for a small investor like me. Thus, fractional shares allows me to buy 0.10 ADR shares for $560 thus giving me as a small investor the same opportunity a larger investor has in owning a stake in this wonderful business.
  2. Be able to put cash to work immediately.  One of the stocks in my portfolio I would like to re-invest my dividends in s Coca Cola. The problem is the shares trade for $46 but I only currently receive $30 in annual income from this stock. I thus have to wait two years before I can reinvest dividends to buy additional shares. Fractional shares eliminates this problem as I can use the quarterly dividend I receive of $7.5 to buy 0.16 shares in Coca Cola and thus put my money to work immediately and benefit from a longer period of compounding.

For those readers that want more technical details regarding fractional shares e.g. who owns the full share, etc. I suggest you read this Drivewealth article.

Are stocks held in a ring fenced custody account and away from short sellers?

Upon being authorised as a stockbroker, a ring-fenced nominee account will hold the shares on behalf of individual investors. No lending out to short sellers.

Personally for me, this is a big point. I see too many brokerage houses lending shares to short sellers and this is to the detriment of small investors like you and I. To understand why have a read of this Business Insider article.

How safe is Freetrade i.e. is it FCA registered?

Freetrade Ltd is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the FCA.

As mentioned above, Freetrade have applied to be a directly authorised stockbroker with the FCA:

Any there any ‘hidden’ fees? For example some low cost brokers have a dividend processing and exchange connection fees for foreign markets (I am looking at you Degiro!)

The people at Freetrade are staunch on the point that they are no hidden fees as they want to be as transparent as possible. The platform will not have dividend processing fees or anything similar or exchange connection fees.

This is the further remarks I have received:

“Hidden fees go against our mission at Freetrade. We want you to have a comprehensive understanding of your costs, so you can make the right trading decisions.”

My Thoughts So Far

From what I have seen so far Freetrade seems like a welcome disruption to the online stock broking world. The real test from my perspective will be to see if Freetrade is able to deliver on what’s promised – low costs with a high user experience. I will be writing a review on Freetrade once it is launched so be sure to check back. In the meantime, I have signed up to the waiting list and have been inviting friends using the code provided in order to get bumped up the queue and be one of the first users of the app.

Please like & share:
  • Tom P

    Hi – this is VERY exciting! I couldn’t agree more about retail investors being ripped off with the current costs of dealing. I have tried looking online but there isn’t a huge amount more info about Freetrade than what you have written above…I know they will offer ETFs but do you know if they will offer traditional funds as well?
    My other question is whether this will set off a snowball effect. Namely, will other platforms have to follow suit and reduce their fees in order to stop everyone transferring their accounts across? As long as the service on offer here isn’t completely bare bones or doesn’t have a limit on number of trades etc. I can’t see why people wouldn’t use this. Finally, could this approach create a surge in the number of people investing, and therefore provide a boost to the markets? I know this is looking way ahead and it’s just one platform, but a lot of people are put off investing by the dealing charges and this will remove this barrier.
    Be interested to hear your thoughts!

    • moneygroweruk

      Thanks for the comment Tom. It is great to finally see some sense of sanity coming to the stock brokerage market. If you look at the net profit margin of various share dealing platforms, they are persistently above 40% which is extremely high.

      Yes, there is not much information currently on Freetrade and that is why I decided to do an article. At present, they are are more focussed on talking to their members as opposed to the media which is great so it is worth signing up to the site. The upside of not advertising themselves is that costs remain low which can be passed on to users.

      I’m not sure if they offer traditional open ended funds but I will find out so be sure to check back. But I suspect not as traditional funds also charge excessive fees which shouldn’t sit well with a free trade user.

      It would be great if other platforms follows suit by lowering charges. But I’m really not sure if this will happen. Many investors still don’t understand how costs eat into returns so will remain with the incumbents. Customers of investment platforms are ‘sticky’ in the sense that they are unlikely to move – similar to banks. This needs to change. Furthermore, some platforms have a different target market to Freetrade so I don’t see them lowering fees. For example, Hargreaves Lansdown is popular with older investors and people who need ‘hand holding’ so I don’t see many people from this platform moving to Freetrade (HL is great for what it does even though it may be costly).But hopefully people see how much costs do eat into returns and see the benefits of a platform like Freetrade.

      The last question is a really interesting one and deserves a post on its own. A decade or so ago, there was a US theory that as baby boomers started retiring in droves from 2016/2017 onwards, they would have to change their asset allocation from stocks to bonds causing stock markets to remain subdued or even crash. But the financial crises happened, interest rate went to zero causing baby boomers to stay in stocks as opposed to moving to bonds so this sort of things are hard to predict. But naturally if there is a surge in investor numbers, it means more money is going into the stock market which will cause stock prices to go up. It is also worth noting that individuals investors only currently own 10% of UK markets so the surge in investor numbers would have to be large.

      Hope this helps.

      • Tom P

        Hi, thanks for your reply and yes it is very helpful!
        I have signed up to Freetrade so am very interested to see how it develops. Give what you’ve said I would suspect that they won’t offer traditional funds as their pricing structure wouldn’t seem to fit with their low-cost philosophy. Confirmation either way would be great though.
        Thinking about it Freetrade might not cause quite the shake-up I initially suggested. As you say, HL is a market leading platform yet it in my opinion charges among the highest fees. Why are people willing pay more? Because of the quality of the service on offer and the ‘hand holding’ HL provides. People don’t have the time to do all the work themselves. And this view can be extended to stocks in general – a big reason why people don’t invest is because they don’t have the time or inclination to figure out how it works. That’s why there’s a whole industry out there for financial advisors and stockbrokers!
        So while Freetrade will definitely rock the boat and perhaps force some platforms to reduce their fees, it might not provide quite the level of change I previously thought. Yet as a small retail investor with an (at present) modest portfolio I for one am still very excited by it and will be signing up if everything goes to plan.

        • moneygroweruk

          Hi Tom,

          Just to confirm, Freetrade will not be offering open ended funds

          Yes, I do think Freetrade will capture the market for investors who understand costs and how they compound over time. It’s such a shame that many people don’t realise the importance of keeping costs to an absolute minimum and thus they will stay with the brokers they are with. This is one of the reasons for starting the blog, to educate people on this sort of thing. I think most

          Picking up on your earlier comment, one important thing to note is that Freetrade see themselves as a tech company – they want to have the most modern solution on the market. Tech companies in general are renowned for their great user friendliness. So I don’t see this service as being bare boned. As a future user I can’t wait for launch and hopefully it is a product that will be greatly beneficial to us retail investors .

          • Tom P

            Thank you again for your reply MG. The lack of funds is not necessarily a problem for me. If all looks well with Freetrade then I will possibly use my existing platform (a fund specialist) for funds and then start using Freetrade for stocks/shares. I’m not sure whether it would be worth the cost of transferring my existing holdings across though given the charges involved! At the very least I can start making any new purchases there though. The key as you say, is to minimise trading costs. I will be keeping a keen eye on Freetrade for sure. Thanks for your thoughts.