Selecting an Online Broker

Internet technology has revolutionised personal investing, bringing information, data and trading technology to a mass audience.

Now the DIY investor is accustomed to the ability to research companies, buy and sell investments on a computer or mobile device in markets around the world and be able to monitor the performance of their portfolio in real time.

Online stockbrokers have been around for a decade and a half now and there are a number of things to consider when selecting the right one for your personal circumstances and the financial instruments you wish to trade.

Terms used to describe the various types of platform such as ‘execution-only (XO) stockbroker’, ‘fund supermarket’, ‘discount broker’, ‘wrap platform’, ‘direct to consumer (D2C) platform’ are often used interchangeably, but the common threads are the ability for an individual to open a personal account or accounts, and trade and monitor their own investments.

Since the government’s Retail Distribution Review (RDR), the fees charged by the platforms are more transparent, and with no hidden commissions an investor will either be charged a commission on each buy or sell trade, a percentage of the value of the investments they hold, or a combination of both.

When selecting a broker it is important to consider what asset types you are likely to trade and in what bargain sizes so that you can compare the charging structure of the brokers you are considering.

What will you Invest in?

 
Will you invest in managed funds or in shares, investment trusts or exchange traded funds (ETFs)?

Some brokers charge a percentage ‘platform fee’ for holding funds (unit trusts and OEICs), based upon the value of the holding – often in the region of 0.20%  – but make no platform charge for holding shares, investment trusts and ETFs.

Others brokers do not charge a fee for holding funds so it wise to shop around to ensure you find the most cost effective platform for your individual portfolio; a little spadework up front can avoid lengthy and potentially expensive transfer fees down the line.

Brokers will usually charge a commission for buying & selling shares, investment trusts and ETFs – typically around £10; some charge for buying or selling funds although several make no charge for funds.

What is the Value of Your Portfolio?

Online brokers mainly divide into two categories, those that charge a percentage platform fee based on the value of your investments and those that charge a fixed annual/quarterly fee regardless of how much is held with them.

As a rule of thumb, if your portfolio is greater than £30,000 then it will probably work out cheaper to look at the fixed fee providers and for less than £30,000 the percentage fee will probably be better.

Lump sum Investment or Smaller Regular Investments?

If you are making a small number of high value investments it would make sense to select a broker that charges fixed rate, rather than percentage based, commission.

A popular way to build a portfolio is via regular monthly investments and if that is the method you choose, a number of brokers offer low dealing commissions for regular investments made via direct debit.

Whilst some brokers make no transaction charge for the purchase of funds, those that do often offer a regular investment discount – maybe charging £1.50 or £2.00 per investment per month.

Total Costs

The total cost of running your investment portfolio via an online broker comprises the charges made by the platform, the commission charged for buying or selling the investments and the cost of the investments themselves.

As an example, it may cost more initially for a one-off purchase of an investment with a particular broker, but there may be no ongoing platform costs or fund charges if holding individual shares.

Low cost index tracking funds (ETFs) are becoming more popular with small investors; ongoing charges for some are less than 0.10% p.a. which represents very good value as long as that is not hiked by the cost of holding them on a higher charging platform.

An extra 0.20% in broker charges may not seem much but on a typical portfolio of around £25,000 it will be an extra £50 every year.

Once you have considered these fundamental differences, it should be easier to narrow down the best choices for the most suitable broker. Cost is important but it may not be the only consideration.

More Things to Consider

Does the broker offer all of the account types you want, or may want in the future? – ‘Dealing’ or ‘General Investment Accounts’ (GIA) are pretty universal, but is there an option to open ‘Individual Savings Account’ (ISA) or ‘Self Invested Personal Pension’ accounts? If you choose the latter does the broker support all of the investments you may wish to include within your SIPP?

Does the broker offer the type of investment you wish to hold in your portfolio? – How wide is the universe of funds, investment trusts or ETFs offered by the broker you are considering; most will be happy with the selection on offer, but those looking for more adventure may need to find a broker that has a larger than average range of investments.

What range of portfolio tools, support and education are offered? – It can be an advantage to view your portfolio online and also to maintain a ‘watchlist’ of investments you may be considering for the future. You may wish to filter shares for things like size, historical dividend etc.

How will you be able to access your account? – If online technology changed retail stockbroking forever, smart phones and tablets mean that as long as you select the right broker you have access to 24/7 valuations and the ability to trade on the hoof.

Is there a facility for dividend reinvestment? – If you are likely to hold investments which produce an income such as the dividends from shares or investment trusts or coupon payments from bonds, check the broker’s ability to re-invest it – is there a facility for dividend reinvestment to be done automatically and if so, is there a charge?

Are there additional charges for telephone trades? – In the past it was common for brokers to charge a flat fee regardless of instrument or channel; however, many now reflect the extra costs they incur in maintaining a dealing team, and telephone trading can sometimes be an expensive, if occasionally unavoidable, pursuit.

What are the exit fees in the event you wish to move to another broker? – Typical fees are usually based on whether you wish to transfer your portfolio over without having to sell and then repurchase with the new broker and will be around £20 – £30 per line of stock; if you hold many different investments, it could be very expensive to transfer out.

Will you want to hold overseas listed investments? – If so, make sure this option is available and check out any additional costs.

Is help available should you need it? – Some brokers are unashamedly ‘online’ without even a sign of a phone number to be found; others have extensive customer services teams to provide guidance and support to those less familiar with online stockbroking or experiencing difficulties. Some brokers will also offer services such as access to one-off advice or portfolio reviews.

Does it offer any other options? – An increasing number of brokers offer ‘model portfolios’ – a range of risk-adjusted ready-made investment solutions based upon the investor’s personal circumstances. Others are introducing automated investment advice, sometimes ‘robo-advice’, which allows a algorithmically selected portfolio to be viewed next to a DIY portfolio.

There is therefore no single one-size-fits-all best broker, the best one for any individual will be the one that ticks the most boxes according to their specific situation and requirements.

Similarly there is no requirement for an investor to maintain all accounts, or account types, with a single broker; the best fit for your ISA may not give you what you are looking for in a SIPP account.

There are a range of comparison sites that will allow you to try out permutations of account types, investments and tariffs to allow you to find a best fit.