I saw on Reddit yesterday that Interactive Brokers now offers an ISA. Potentially, this could be exciting news, opening up a new ISA option for Americans in the UK. Why? Because IBKR is both a) generally very low cost and b) friendly to US citizens outside the US. I already have Roth IRAs with IBKR (will write up that experience soon), so consolidating my ISAs there could be interesting.
So I thought I’d do a quick comparison with my current broker and usual recommendation for Americans in the UK, Hargreaves Lansdown. Cutting to the chase: it’s not clear to me yet if IBKR is a better option than HL, but at least it’s good to have other options coming – competition can only help. I can’t do anything until the new UK tax year on 06Apr anyway, so will see how things develop over the coming months before making any changes.
Costs & Fees
IBKR and HL take very different approaches to their fee structures:
- HL is fairly simple, but can be pretty expensive:
- Dealing: £11.95 per trade, but purchases can be brought down to £1.50 using the Monthly Savings feature (also tapers down if you have 10+ trades in the previous month, but you probably want to avoid that kind of active trading)
- Dividend Reinvestment: 1%, with £1 minimum and £10 maximum
- Platform Fee: 0.45%, capped at £45 per year (assuming you hold individual stocks, which is your only real option as a US taxpayer to avoid PFICs)
- Currency Conversion: 1% up to £5,000, tapering down to 0.25% for over £20,000
- Withdrawals: no fee
- IBKR fees and commissions are generally low, but horrendously complex:
- IBKR generally offers a Tiered and a Fixed fee option – Tiered is almost always cheaper, but it’s not clear to me if Tiered will be an option for ISAs
- On Fixed, it’s £3/€3/3 CHF/3 USD for all trades on European exchanges up to £6,000/€6,000/10,000 CHF/$8,000. Trades bigger than that are 0.05%. For US exchanges, it’s at least $1 per trade (or $0.005 per share, if that’s higher, up to a maximum of 1% of trade value).
- On Tiered, for European exchanges it’s 0.05% of the trade, minimum of £1/€1.25/1.50 CHF/$1.70. For US exchanges, it’s $0.0035 (~1/3 of 1 cent) per share, minimum $0.35, max 1% of the trade value.
- Dividend Reinvestment: charged the same fees as other transactions. Automatic reinvestment is only available for US and Canadian stocks, other stocks would have to do it manually.
- Platform Fee: £3 per month minimum activity fee. Either you pay at least £3 in commissions for trades, or you get charged a £3 fee (or the difference, if you have some commissions but less than £3).
- Currency Conversion: 0.03% – best on the market that I know of
- Withdrawals: One free per month, £7 after that – should never need to pay this if you plan ahead.
A couple of illustrations:
- Buy £1,000 of a UK-listed individual stock, like part of a pseudo-indexing portfolio:
- HL: £1.50 if you plan ahead using Monthly Savings
- IBKR Fixed: £3
- IBKR Tiered: £1 (the minimum, since 0.05% of £1,000 is less than £1)
- Buy £20,000 of a US-listed stock, like if you decide Berkshire Hathaway is close enough to a diversified mutual fund that you put everything there:
- HL: £11.95 dealing fee (I can’t find any US stocks on the list for Monthly Savings) plus currency conversion fee of £137.50 = total £149.45
- IBKR Fixed: £20,000 buys you about 85 shares of BRK.B. At $0.005 per share, that’s less than the $1 minimum, so it’s $1. Add 0.03% currency conversion of £6 = total about £6.75
- IBKR Tiered: At $0.0035 per share, this is just under the $0.35 minimum, plus the same £6 currency conversion = total about £6.26
- One year of my pseudo-indexing approach of 20 UK stocks purchased in one month, assuming 40 dividend payments a year:
- Dealing: 19 stocks at £1.50 using Monthly Savings, plus 1 stock at £11.95 to soak up the unused cash = £40.45
- Platform: £45 a year
- Dividend Reinvestment: 40 dividends x £1 each = £40 (in practice will be a bit less, since not every dividend will be big enough to buy a full share)
- Total: £125.25
- When you eventually sell (far in the future!), it’ll be £11.95 per stock, or maybe a bit less if you have enough transactions to move down the dealing fee table. That’s £239 future cost, although could be spread across many years of contributions.
- IBKR Fixed:
- Dealing: 20 stocks at £3 each = £60
- Platform: £3 per month, one month this is covered by the dealing fees, so 11 months = £33
- Dividend Reinvestment: 40 reinvestments x £3 each = £120 (also going to be less in practice like HL)
- Total: = £213
- Future selling fees: 20 stocks at £3 each = £60
- IBKR Tiered:
- Dealing: 20 stocks at £1 each = £20
- Platform: same as Fixed = £33
- Dividend Reinvestment: 40 reinvestments x £1 each = £40 (again, going to be a bit less)
- Total: £93
- Future selling fees: 20 stocks at £1 each, or maybe a bit more if the value is high enough to exceed the minimums = call it £60 for argument’s sake
In summary, for regular pseudo-indexing in UK stocks, if IBKR Tiered is an option, it’s moderately cheaper than HL (£30ish a year), while Fixed is a bit more due to the higher dealing fees. But if you want non-GBP stocks, IBKR becomes dramatically cheaper, on either Fixed or Tiered, due to the far lower currency conversion fee. Also, if you want to trade actively, instead of using Monthly Savings, the HL dealing fees skyrocket and either IBKR pricing scheme is much cheaper.
It is clear you generally wouldn’t want ISAs at both, or you get stung by both the £45 and £36 platform fees every year, so you need to pick your poison.
IBKR is known for good margin rates and options, but within an ISA they only allow:
- Securities issued by Companies
- Recognised UCITS
- Depository Receipts, American Depository Receipts and American Depository Shares
Due to PFIC and MiFiD/KID rules, that will mean it’s just individual shares for US citizens, same as Hargreaves Lansdown. No difference here that I can see.
This is one I can only describe from other people’s anecdotes, so take with a big grain of salt – I haven’t had to use customer service with either company yet.
HL has a generally good reputation for customer service, being known as a relatively high-fee, high-touch broker. It’s help documentation is generally clear and concise.
IBKR has a generally poor reputation for customer service, as a low-fee broker. They enable some very complicated things (especially outside ISAs), and expect their customers to be knowledgeable about what they’re doing. They have extensive help documentation, but it’s not always that clear. I’ve heard their phone support isn’t all that helpful.
The experience of each aligns with their customer service. HL is a slick-feeling website and app, nicely laid out, generally pretty intuitive. IBKR’s user interface feels about 20 years old, it’s not always easy to find where to go to do what you want to do, but the capabilities are all there somewhere and it’s quite efficient once you learn it.
I would not recommend IBKR for somebody who is brand new to investing, it’s intimidating at best and possibly an error trap. HL makes it easy for new investors, although US citizens need to be careful because they won’t stop you from doing things that are legal but have horrific US tax consequences.
I’ve already used up my 2021-22 ISA allowance, so I can’t do anything right now anyway. But I will be keeping an eye on any user reports on IBKR ISAs, especially to confirm if Tiered pricing is an option. If Tiered is an option, it’s certainly worth thinking about, although whether the hassle of moving existing investments is worth the modest £30 a year savings is an open question – you also buy into a tiny marginal hassle of doing manual dividend reinvestment. There doesn’t appear to be any fee with HL or IBKR for a transfer of stock, but I don’t know how much pain it will involve.
If any of you decide to open an ISA with IBKR, I’d be very interested in your experience!