When you survey the top UK stockbrokers, whether measured by assets under management or by the size of their client base, you’ll notice the dominance of British firms in that list.
The last time we updated our compilation of the biggest stockbrokers by the number of clients in 2023, the top firms were:
- Hargreaves Lansdown (read our HL review)
- interactive investor (read our ii review)
- AJ Bell (read our AJ Bell review)
Each of these firms is squarely based in the British Isles. The city of Bristol hosts the HQ of Hargreaves Lansdown, and interactive investor and AJ Bell are managed from Leeds and Greater Manchester respectively.
And this is to say nothing of the £ billions in assets managed by UK-domiciled pension & life assurance firms such as Legal & General, Aegon, Aviva and ABRDN (formerly Standard Life Aberdeen). Each of these firms was founded in the UK, and isn’t merely the UK subsidiary of a multinational group based elsewhere.
This article will examine why British firms are so dominant within the UK retail investment space.
The best UK stockbrokers dominate thanks to 5 key factors:
- London as a global financial capital
- The prudent but flexible regulatory regime
- Relative political and economic stability
- The ‘trust factor’ of British firms
- LSE: The ‘global’ domestic stock market
1. London as a global financial capital
London is often cited as one of the financial capitals of the world, alongside New York, Tokyo, and Hong Kong. Such shortlists are several decades out of date; no modern list would exclude the likes of Shanghai, Silicon Valley, and Mumbai.
The City of London, as its financial district is often known, grew off the back of the buoyant mercantilism of the 18th and 19th centuries. Britain’s economy was among the first to industrialise using new power sources such as steam and later, electricity. As the ‘workshop of the world’, Britain began to export significant volumes of goods to other countries. Large financial services firms were necessary to handle international payments, as well as to facilitate the financing and insurance for these ventures.
While The City has since lost its global crown – the capitalisation of companies listed on its stock market is now less than 1/10th of its American rival the New York Stock Exchange for example – the size of its financial services sector is still gigantic relative to the rest of the UK economy.
That’s thanks in part to an independent judicial system, quality education institutions and the inherited privilege of speaking the world’s business language from birth. Many investors and firms the world over continue to entrust UK institutions with their financial matters. The finance sector employs 1.1 million – and that figure continues to grow.
A large, outsized financial services market is naturally home to large asset managers and brokers. Size is definitely an advantage when brokerages are concerned. Fixed costs can be borne by high trading volumes, allowing large UK brokers to price their services at a competitive rate.
UK retail investors, when presented with not one but many large, mature and prestigious firms have little reason to look elsewhere.
2. Prudent but flexible regulatory regime
When a layperson is asked to comment on the effectiveness of regulation of the UK’s financial services sector, the typical review may not do the system much justice.
While the failures of firms have occurred in the past – a failure does not in itself provide evidence of an ineffective regulatory system. A regulator cannot force a company to be financially successful – many market factors, operational choices, management styles and even marketing strategies will all come into play. A strong regulator should not encourage weak firms to survive.
What matters most is what happens next. What happens to retail investors when firms do fail?
In 2010, thousands of UK savers were impacted by the bankruptcy of several Icelandic banks in the wake of the ‘credit crunch’, which starved firms of cheap liquidity.
The UK regulator stepped in and guaranteed deposits (up to £85,000) per financial institution via the Financial Services Compensation Scheme. The scheme resulted in payments within a matter of months. That scheme; the FSCS, is still in place today.
When banks suffered the worst runs on record for decades in the wake of the Lehman Brothers collapse in 2008, the UK government injected confidence when it was needed, by taking large equity stakes in Royal Bank of Scotland and Lloyds Banking Group, to stave off further collapses. While the decision to bail out the banks was politically unpopular because it was seen as a move to reward the excessive risk-taking of an elite class, history has proven it to be a sound judgement. An independent report by Rothschild in 2015 concluded that the state could make a profit on the investments it made. A more recent assessment suggests the true direct cost of the intervention was £23 billion. This, however, doesn’t even begin to take into account the indirect benefits of having staved off a wholesale collapse of the banking sector.
Consider too the recent timely intervention of the Bank of England in the wake of the damaging 2022 ‘mini-budget’, which torpedoed the value of government bonds; an asset relied upon by pension funds for the majority of investment returns, and an instrument that is used to price derivatives they were using as part of complex ‘liability matching’ strategies. The Bank declared that its intervention prevented pension funds from collapsing from market turmoil. Few firms have disagreed with this assessment.
Therefore, we can conclude that in spite of dramatic events in the financial markets, the regulators and UK government can be relied upon to take action as required to protect investors and citizens. This means that the ‘Fully authorised by the FCA’ label carried by UK stockbrokers is a stamp of quality that carries significant weight with retail investors. When British investors entrust their money with a regulated UK stockbroker, they are also trusting the regulatory framework to protect them should the worst happen.
3. Relative political and economic stability
Through a count of the number of different Prime Ministers in office over the last five years (five), the stability of the UK’s political environment must look perilously low to outside observers.
However, when you look past the farce and newspaper headlines, many contributors to the UK’s relative stability have not changed.
The UK’s voters are not as highly polarised as the US, and therefore the outcomes of elections (regardless of how commonplace they have become) are less dramatic, which calms the markets. While the Labour Party does hold different positions to the Conservatives on issues such as immigration and public services, the differences are incremental; Labour would like to spend and tax more, while Conservatives would like to spend and tax less. These amount to different ideal ‘settings’ to dial in but switching between these wouldn’t fundamentally upset the system itself.
It is also worth considering how different their policies would really be in reality. The Conservatives champion small government, but inconvenient realities saw the Tories vote through massive spending packages during their time in power, such as the £70 billion Furlough Scheme and the £20 billion + Energy Price Guarantee that is still in effect at the time of writing.
As mentioned earlier, the independence of the UK’s judiciary system is also beyond disrepute. A survey conducted by the Office for National Statistics in 2022 showed that the courts and legal system (trusted by 68%) were trusted by a far higher slice of the population than the national government (35%), making the judiciary the second-most trusted public institution. The winner was the National Health Service, which 80% of respondents said that they trusted.
Trusted courts help foster a strong belief that savings and investments made today will still be there tomorrow. UK investors need not entertain the risk of funds being pilfered or plundered by politically connected individuals. Investors in other countries, particularly emerging markets, may not feel the same way. This means the political risk of investing with a British stockbroker is still low, regardless of the frequency of leadership contests within political parties.
The British economy, while sluggish, is still performing decently. Among OECD economies, the UK is expected to underperform similar nations over the next few years, thanks to Brexit and the labour shortages and barriers to trade that leaving the EU has created. However, the British economy has still shown resilience. In spite of record whole gas prices and a cost-of-living crisis, the British economy has recorded only small reductions in output and appears to have avoided a deep recession. Its labour market remains tight and businesses have not stopped investing, despite continued uncertainty surrounding Russia’s war in Ukraine and global commodity prices.
4. The trust factor of British firms
Any domestic firm will enjoy a boost from local investors feeling good about using local companies, who employ local employees, to manage their money.
- HL’s website positions their brand as the ‘UK’s number one‘ for investments.
- AJ Bell’s ‘About Us’ page opens with the explanation that they are ‘…one of the UK’s largest and best regarded investment platforms.‘
- Interactive Investor’s ‘About Us’ page explains that they are ‘now the UK’s number one flat-fee investment platform.’
Each of these companies aren’t merely flexing their scale but also their Britishness. They want prospective clients to understand that other UK investors have trusted them too.
5. LSE: The ‘global’ domestic stock market
British investors are lucky in the sense that they have a global stock market at their fingertips.
The London Stock Exchange, which is measured by the prominent FTSE 100, FTSE 250 and FTSE All-share index, is highly diversified across sectors and geographies.
This means that British investors can make cheap, trades in their own currency while purchasing businesses with economic interests around the world.
Whilst lagging behind the S&P 500, an index of leading US-listed firms, the returns of the FTSE 100 have been appealing enough to encourage many UK households to take a leap of faith and invest properly for their future, rather than simply saving in a cash deposit account.
For someone based in Georgia or Portugal, for example, without access to a historically successful stock market in their own country, the decision to invest is more difficult, as the most popular options will seem exotic and riskier.
But with that being said, UK firms enjoy a range of benefits simply by being based in the UK. They thrive within a well-balanced regulatory and legal environment that is viewed favourably by investors around the world. They tend to be larger, thanks to the City of London’s history as a financial superpower, and with the Union Jack flying on their company headquarters, they’ll be preferred by British citizens who are looking for familiarity and trustworthiness when searching for a broker.