One of the first and most important questions you need to ask yourself before you start investing is which platform you should trust with your nest egg.
You may feel tempted to invest with a familiar brand, like your current account provider. Nowadays, the major high street banks offer “ready-made portfolios” for investors who want the ease and simplicity of a fund tailored to their risk profile, allowing them to choose between funds with labels such as “cautious”, “balanced” and “adventurous”.
But there is a price to pay for investing through retail banks, whose portfolios are infamous for delivering lacklustre returns.
Here, Telegraph Money weighs up whether or not a high street bank is the best home for your Isa.
Higher risk doesn’t mean higher returns
Over the past five years, you would have been better off investing in a cheap global index tracker than putting your money in even the most adventurous portfolios offered by Barclays, HSBC and Santander.
The Barclays Wealth Global Markets 5, Santander Atlas Portfolio 7 and the HSBC Global Strategy Adventurous Portfolio have returned 38pc, 30pc and 45pc respectively over the past five years, whereas the Fidelity Index World tracker has delivered 68pc in the same period.
This is despite the fact that these funds are labelled “higher-risk” by the banks. In exchange for shouldering more risk, you would expect to be rewarded with high returns. But hefty charges and the use of cash and bonds have dragged on the funds’ performance.
Rob Morgan, of wealth manager Charles Stanley, said these multi-asset funds are taking “a lower level of risk than a pure equity fund”, which explains why they have lagged behind those that simply track the stock market. The banks’ adventurous funds all have between 80pc and 90pc of their assets in shares.
Spokesmen for Barclays, HSBC and Santander said that because their funds have exposure to a mixture of equities, bonds and cash they should not be compared to tracker funds that are linked to a single index because they are not “like-for-like”.
Some of their portfolios have less than 20pc in equities. These low-risk portfolios have done even worse. Barclays Wealth Global Markets 1, which has 18pc in shares and the rest in cash and bonds, is down 5pc over the past year, whereas HSBC Global Strategy Cautious Portfolio and Santander Atlas Portfolio 3 have fallen 6pc.
Now read: How to invest like the best (and the strategies to avoid)
Tracker funds often prove cheaper
The portfolios also charge, in some cases, 10 times as much as a cheaper tracker fund. The most expensive of the banks’ portfolios is the RBC Coutts Managed Adventurous fund, which has a 0.65pc annual management fee and charges 0.27pc for other costs including custodian fees.
Santander Atlas Portfolio 7, meanwhile, charges 0.55pc. The cheapest is the HSBC Global Strategy Adventurous Portfolio, which charges 0.2pc.
Bear in mind that these funds are mainly invested in passive funds themselves. The top holdings of Santander Atlas Portfolio 7 are the Invesco S&P 500 ETF and the HSBC FTSE All Share Index.
Over time, charges will eat into your investment returns. An advantage of tracker funds is they carry fees as low as 0.06pc, in the case of the Vanguard FTSE UK All Share Index Unit Trust.
On top of fund fees, you will also pay a platform fee to the provider. Ian Millward, of financial advice firm Candid Financial Advice, said that in this respect some banks “are much better value than the old established players.”
Barclays Smart Investor charges 0.2pc a year plus £3 a fund trade, with a maximum monthly charge of £125.
But whether this is cost-effective for you depends on the size of your portfolio. The 0.2pc fee makes it a relatively cheap option for someone with a £50,000 pot, who would pay £512 a year.
However, for those with larger pots, charges could add up to a maximum of £1,500 annually. These investors would be far better off with a platform that charges a flat fee, like Interactive Investor, which charges £120 annually.