Costs
Somebody earns interest on the cash you left uninvested
Cash sitting in an investment account earns interest for somebody. How much of it reaches you is a commercial decision made by the provider.
The options around interest retained on client cash are set out side by side below, with the conditions that genuinely favour one over the other.
The difference in one place
- Providers retain part of the interest earned on client cash balances.
- A low headline fee can be subsidised by interest retention.
- The cost falls only on customers who hold cash, unevenly.
The arrangement
Client cash held by a platform sits in bank accounts, where it earns interest at whatever rate the platform has been able to negotiate. The platform passes on some portion of that interest to customers and retains the remainder as revenue for itself.
The split is disclosed, usually on a rates page that sits separately from the main schedule of charges. The retained share can form a substantial part of a platform's income, particularly during periods when interest rates are high. This is legal, disclosed and widespread, and it is also invisible to anybody who has not gone looking for it deliberately.
Why it matters more than it looks
A low headline platform fee can be subsidised by interest retention, which makes the apparently cheap platform less cheap than advertised. The cost falls entirely on customers who hold cash, which means it is distributed very unevenly between users of the same service. People holding cash while deciding what to buy are paying this continuously without ever seeing a charge appear.
For most people, retirees keeping a spending buffer inside the investment account can be paying it on a meaningful balance for years. Comparing platforms on headline fees alone will therefore systematically favour those recovering more of their revenue this way.
Where the incentives point
A provider earning revenue from cash balances has no particular reason to remind you that your money is sitting uninvested. That is not an accusation of misconduct; it is an observation about which prompts get built into an interface and which do not.
In practice, it is another reason the cash line on your account deserves a deliberate glance at the annual review. Regulators in several markets have taken an interest in interest retention, and disclosure requirements have been tightening in places. Those rules differ by jurisdiction and are changing, so the current terms published by your own provider are the only reliable source.
What to do with a working balance
Some cash is genuinely needed for charges and for the mechanics of dealing, and a small working balance is entirely normal. Cash held as a deliberate part of your allocation may be better placed somewhere paying a competitive rate rather than inside the platform. Money market funds and short-dated instruments are alternatives with different risk characteristics and charges of their own.
In practice, splitting cash between an investment account and a separate savings account adds admin, and may be worth it at larger balances.
Whether it is worth it depends on the sums involved and the rates on offer, both of which move over time.
Finding the actual number
Search the provider's site for a cash interest rate page, which usually states the rate paid and sometimes the rate received. Compare that with what an ordinary instant-access account at a bank is paying at the same moment. Multiply the difference by the cash you typically hold to produce an annual figure comparable with the platform fee.
For most contributors holding almost no cash, the answer is negligible and the exercise ends there in five minutes. For anybody holding a large cash position inside an investment account, it can rival the explicit charges entirely.
The general lesson
Revenue a provider earns without sending you a bill is the hardest kind of cost to notice and therefore the hardest to resist. Spreads, conversion margins and interest retention all share that property, and every one of them is disclosed somewhere.
In practice, the disclosure is not hidden so much as placed where nobody has any particular reason to look for it. One afternoon locating all three for your own provider is enough, and the answers change slowly after that. The point is arithmetic rather than outrage: what a provider costs is what they earn from you, not what they invoice.
Side by side
| Consideration | What it means in practice |
|---|---|
| The arrangement | Providers retain part of the interest earned on client cash balances. |
| Why it matters more than it looks | A low headline fee can be subsidised by interest retention. |
| Where the incentives point | The cost falls only on customers who hold cash, unevenly. |
The takeaway
What a provider costs you is what they earn from you. The invoice is only the part they chose to show.
The version you keep doing is the version that works.
Questions readers ask
Is retaining interest on client cash allowed?
It is common and disclosed in most regulated markets, though rules and expectations differ by country and have been tightening in some.
Should I move cash out of my investment account?
It depends on the sums and the rates available. For a small working balance it makes no difference; for a large cash allocation it can be worth comparing.
