Thanks to the evolution of the British stockbroker market, alongside improvements in technology and changes in investor appetite, the current selection of stockbrokers to choose from in the UK is absolutely mind boggling.
If you jump onto a stockbroker comparison service, you’ll first notice that brokers tend to be compared by their investing costs. This typically includes the platform fee (a periodic account fee, usually charged as a % or a fixed amount), and a dealing charge (the cost of making a single trade such as to buy a share).
These metrics make for easy comparisons on simple tables, and they give a user a sense of objective comparison when looking at such a long list. However, it’s also pretty misleading to focus only on a couple of numbers, because the list of brokers might be more diverse than you realise.
There are over six different types of broker, all of whom could feasibly appear next to one another on a UK stock broker comparison table. Without understanding what types these areas, and what makes them different, you won’t be able to put the stats and figures into context properly.
If you were looking at a ‘food comparison’ website which listed popcorn, a steak dinner, a microwave meal and an apple, you would have a similar problem. Yes, they’re all food. But is measuring them by price alone really a useful way to decide which food to buy?
The 5 Types of Stockbroker
The Robo Adviser
Robo Advisers are investing platforms which automate the process of selecting which funds to invest in. Offering perhaps the most user-friendly service of all brokers, a robo adviser demands little from a customer by way of investing knowledge. Simply take an investment risk appetite survey and tell them how long you want to invest for, and they’ll take care of the rest. Robo Advisers are so simple to use that it often just feels like an exotic savings account.
The Fund Supermarket
Fund supermarkets popped up over a decade ago when smart brokers realised that rather than chasing commissions on each trade, they could earn much more commission by receiving a cut of the annual management fee that funds charge to their customers if they were to direct their own customers to those funds.
‘Trail commissions’ are they were known, drove a wave of fund supermarkets to open. These were investment accounts that charged very little (if any) fees to the investor directly, as their revenues came from the investment funds they promoted.
This appeared to be, and indeed was, a conflict of interest, as investors found themselves directed towards funds which had high annual management charges – a number naturally forced up by the commissions the fund supermarkets were demanding.
Following regulatory change, fund supermarkets (and indeed all financial advisers) were banned from receiving commissions in secret in this fashion, and therefore platform fees appeared for the first time in response.
The full service stockbroker
There still exists firms of brokers offering a full service whereby investors can ring their named broker contact and ask to buy or sell shares, or even ask them for tips or advice. For this reason they are also called advisory stockbroker services.
This feels like quite an antiquated way of making share trades in the modern day, with online pricing charts and automated order execution. But for those who prefer the human touch, and don’t mind paying trading commissions of over £20 per trade, this is still available if you know where to look.
The online-only broker
This broker ate the full-service brokers’ lunch. A little like with the downward march of airline seat capacity and service quality – brokers discovered after the beginning of the century, that while most investors appreciated full service – they weren’t actually prepared to pay for it.
In exchange for sub-£10 trading fees, many investors were happy to abandon telephone contact and place trades themselves from their online-only accounts.
Now that you understand the different types of stockbroker, you won’t be comparing apples to a steak dinner, but to apples when you next research providers!