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Taking control of your money with self-select ISAs can help mix up your investments and make the most of your tax allowance. David Burrows takes his pick of the choices available

One of the major selling points of self-select ISAs is that they have as much appeal to high net worth investors as they do to the novice investor with a couple of thousand to invest. The £7,000 per year maximum ISA investment may not seem much to shout about but over time you are talking about substantial portfolios building up and all out of the reach of the taxman.

Killik & Co is one of the few brokers to offer an advisory service to its self-select clients and as Malcolm Cuthbert, managing director of financial planning at Killik explains, business has been brisk as the appetite for self-select ISAs is more voracious than ever.

‘It doesn’t matter how much or how little you have invested elsewhere, everyone should make use of their annual £7,000 tax-free ISA allowance. Even those with investment portfolios worth in excess of a million pounds are not slow to use up their own and, if possible, their spouse’s annual ISA allowance. The allowance is there for everyone and it would be crazy not to take what is on offer. By the same token we have investors in their 20s just starting their careers who just want to invest, say £2,000 in a self-select ISA.’

Cuthbert adds: ‘I think it is a good philosophy to encourage clients investing the maximum £7,000 per year to take advice on ISA investments because you have to remember that if an investor had made full use of their annual allowances from when ISAs were introduced (in 1999), then that portfolio could now be worth in excess of £100,000. I think instilling at an early stage the benefits of broker advice is a good thing. When portfolios reach this sort of size we like to think clients will take the next step of moving from an advisory service to a discretionary broker service.’

The Share Centre also offers an advisory service for self-select ISA clients and Ian Benning, product development manager echoes Cuthbert’s point that high net worth investors are as keen as anyone to make use of their £7,000 a year tax-free allowance.

‘We have noticed that those with large investment portfolios under the stewardship of a discretionary broker are keen to take the reins of their self-select ISA themselves. It is a good way of learning the ropes but also a way of seeing if a discretionary broker is actually doing their job. If the client is up 35pc over three years but the broker is up only 10pc then questions are asked.’

In terms of steering clients on what they put in their portfolio Benning insists the advisory element is extremely user-friendly. ‘For the cost of a phone call, clients can contact us and ask us for a response on a stock – for instance they might say “what do you think of Tesco?” and we might respond that “no, in that sector we are advising on X or Y stock at the moment from our buy list.” To make life even easier for those investors content to invest in large caps, our website contains our buy, hold or sell recommendations on all FTSE 100 stocks. We provide information and help where we can but of course with a self-select, product it is the customer’s decision at the end of the day.’

Execution only

Most self-select ISA providers offer a straightforward execution-only service and if truth be told the advisory services on offer are very much based on one way traffic – namely that the client has to contact the broker for a view on a stock. Brokers are not going to spend time contacting clients on portfolio weightings and asset allocation guidance. With only £7,000 to invest, advice offered is little more than broker recommendations. In reality self-select ISAs are all about the individual being able to tailor their portfolio to suit their own needs – mixing managed funds with individual shares, gilts, bonds and a string of other investments.

Some might question the wisdom of investing £7,000 in a self-select ISA and then having to monitor the portfolio when it would be far simpler to invest in a collective or multi-manager fund ISA which, should in theory, have already spread the investment risk across a broad number of sectors.

Sue Concannan at Halifax Sharedealing concedes that self-select ISAs may not be ideal for everyone but insists they have distinct benefits too. ‘The big advantage of self-select ISAs is that you can mix shares, with investment trusts and unit trusts, ETFs, gilts and bonds and so on. But if you have only have £7,000 to invest, I’d like to think you had cash savings too. Also if you don’t take advantage of the ability to mix shares with collective funds you might as well just buy funds via a fund supermarket where charges will be minimal. But if you do manage your self-select ISA properly you can tailor a portfolio that has exactly the make up you want and you have the freedom to change the portfolio when you want, not when a fund manager or broker decides.’

Of course the key to running a self-select ISA is keeping a constant eye on all the holdings on an ongoing basis. Aside from knowing when to buy or dispose of stocks or funds, the investor must also be aware of the risks of duplication of stocks as Benning explains. ‘You need to be careful that your individual shares aren’t duplicated in the holdings of your collective funds within the ISA. So if you have bought shares in, say house builders or telecom companies you need to be aware if the funds you have invested in have exposure to these same companies. Ideally you want to spread risk by not being overly exposed to one sector, stock or region. Another way of reducing risk is by using stop losses on stocks to limit any potential downside – not something many ISA investors think about until it is too late.’

Cash to equities

Recent changes to ISA rules could prove of enormous benefit to investors. From 6 April 2008 PEPs and ISAs will be merged. All existing PEP accounts will be automatically become Stocks and Shares ISAs. This is a great opportunity to review old and perhaps redundant PEPs. For the first time it will be possible to view all your PEP and ISA investments on one statement and to devise an investment strategy for them. This is a particular benefit to actively trading self-select ISA investors.

Another major change is that it will now be possible to move Cash ISAs into Stocks and Shares ISAs. Unfortunately the Treasury has decided that it should only be one way traffic for reasons best known to itself.

Nonetheless this has to be a good thing because it enables individuals to re-balance their portfolios and at a time when interest rates might be on a downwards trajectory it could be worthwhile moving money from a Cash ISA to high yielding bond in a Stocks and Shares ISA.

The government have also decided to push up the amount you can subscribe to an ISA from the current amount of £7,000 to £7,200 for a Stocks and Shares ISA and £3,600 for a Cash ISA.

‘These changes are incredibly welcome,’ says Benning, ‘if you have built up £30,000 – plus in a cash ISA over the best part of ten years, you could move, say, £20,000 into an equity ISA in one go, and keep the rest in cash.’ Whatever you move across does not count towards your annual ISA allowance for that tax year either.

Cuthbert agrees that the new rules give greater flexibility but they still don’t go far enough in his view. ‘You can switch from cash to equities but you can’t switch from equities to cash – don’t really understand the thinking there. That said, despite the volatile markets I expect a lot of investors to move from cash to equities when the markets calm down. The fact that PEPs can be consolidated into ISAs now is good news – it means far greater transparency for investors.’

Lukewarm on Reits

Another recent addition to ISA rules is the ability to put Real Estate Investment Trusts within an ISA. In case you don’t remember Reits were the eleventh hour compromise offered by Gordon Brown when he did his u-turn on direct property investment within a SIPP. What Reits offer is a combination of commercial and residential property but within a collective fund. (Property funds have traditionally been just commercial property).

In theory Reits are a great addition to the self-select ISA investor’s options but in reality there has been little interest so far. However, Concannon believes it is early days yet. ‘I think the lack of interest in Reits probably reflects a general lack of enthusiasm for property funds in general at the moment with yields unattractive. But I think in future sentiment may change.’

Certainly there are benefits to Reits. A shareholder in a listed British property company faces double tax: the company pays corporation tax on its property-related business activities, while the investor pays tax on dividends and capital gains. You can put Reits in an ISA wrapper, which means you won’t pay tax on capital gains or dividends.

Costs

Self-select ISAs are only really relevant if you wish to hold individuals shares. This is because fund supermarkets allow you to mix and match funds from different providers within a single ISA wrapper typically cutting fund initial charges to around 0%-0.5%.

Having said that self-select ISA providers do offer better deals than going direct to a fund house and then having to switch and incur charges on the way. And when it comes to the share dealing side of things, self-select ISA investors should enjoy the same rates as any other trader.

‘It really is a case of investors choosing the charging structure that suits them best,’ Bennings says. ‘For instance we charge £2.50 to buy; £7.50 to sell or 1%. For those investing smaller amount the 1% fee is going to be more attractive. Alternatively we offer a frequent dealer flat fee charge of £7.50.’

In fact most companies offer frequent trader rates, however, what you must look out for is the additional charges. Trading fees, management charges and charges for transfers out all enter into the equation. Up to date fee comparisons are provided by

IFA AWD Chase de Vere and can be seen at: www.moneycentral.moneyextra.com/selfselectisa