Investors have a lot of choices to make before they build their first investment portfolio. What asset classes should be core to the portfolio? What investment strategy should be used? What level of geographical diversification is necessary?
One choice that every investor will have to make is which stockbroker to choose. In this article, we’ll explore the question of how much difference does your choice of stockbroker make? Is the choice worth spending time and effort on, or would that time be better spent picking stocks or measuring risk?
The answer is a resounding yes. Here are the stockbrokers that we have rated as the best of the best. One of these could be an excellent choice for you:
Buy and sell funds at nil cost with Fidelity International, plus simple £10 trading fees for stocks & shares and ETFs.
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Trade stocks & options on the advanced yet low-cost Freedom24 platform that arms retail investors with the tools to trade like professionals.
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How can your choice of stockbroker change the investment experience?
Before you try to quantify the impact of your broker choice, you should step back and identify the different ways your broker selection could actually affect the outcomes for your pot of assets.
Your mind probably jumps immediately to fees. The size and frequency of brokerage fees will naturally have a direct impact on your financial performance. However, this is just scraping the surface. Consider the other characteristics of brokers that could in some way alter your portfolio:
- Asset range and availability
- Tax-friendly accounts
- Behavioural nudges
- Regulation & financial stability
In addition to headline fees and charges, we’ll explore each of these characteristics to help you form a full understanding the difference your broker choice could make to your returns.
1. Asset range and availability
An investment not offered by your sole stockbroker is an investment you will never have access to.
Passive investors aim to secure the return of the stock market as a whole, by replicating the whole of the market in a cost-effective manner. Sitting at the heart of this approach is access to cheap ETFs or mutual funds that track broad international bond and equity indexes.
If your broker only allows you to buy individual stocks & shares, you may struggle to match the returns of an investor with a perfectly suited broker that facilitates this.
Conversely, an active investor who seeks to outperform the market will want access to small-cap stocks that are less covered by the media and that provide trading opportunities. It will be futile to perform a fundamental analysis of an AIM-listed UK company only to realise that your broker does not allow you to buy this stock.
Smaller companies are less profitable for a stockbroker to offer to retail investors, as they will benefit from less economy of scale and may pay higher fees themselves to actually place that trade through the market or a member-broker of an exchange.
Therefore, consider whether your choice of broker will hamper or encourage your investment strategy, through the range of assets it allows you to trade. The best UK stockbrokers are very transparent to would-be customers about what markets and instruments they allow their clients to trade.
For example, check out Hargreaves Lansdown’s concise summary of what you can hold in its general investment account, or the Fidelity Investment Finder, which allows you to browse for securities by name.
Liquidity simply refers to how quickly your investments can be converted from their current form into the most useful of all assets: cash.
As cash is practically the only asset that can be effortlessly moved from a stockbroker to a bank, liquidity is the focus when envisioning a scenario in which you need to access your wealth in an emergency.
As all government guidance will back up, stocks & shares are long-term investments and you shouldn’t invest a single Pound in the stock market that you think you may need to withdraw in the next 5 years to spend.
This basic tenant of investing wisdom is so widely applied that you may be wondering why liquidity actually matters at all. If an investment is designed to be held for many years, what difference does it make if a stockbroker needs days or weeks to return cash to me?
The answer lies in the uncertainty of life. Life never follows the plotted course and in spite of excellent intentions and a clear financial plan, it finds a way to surprise even the most sensible of investors. Nobody plans to be made redundant or to divorce in three years’ time. In those bleak scenarios, where life has become turbulent and financial difficulties present themselves, it will be a relief to have a stockbroker that can liquidate your investments and return your funds promptly.
Relevant points to look out for here when choosing a broker are:
- Any penalties or charges applied for withdrawals ahead of a specific deadline
- Any notice period that must be served for withdrawals
- Any daily or weekly cap on the maximum amount of cash that can be withdrawn from an account (this will only apply to wealthy investors).
In general, all stockbrokers will complete trades of listed shares within two working days, so the main differentiation between brokers will come from how they allow you to withdraw that cash, once the trades have been fully settled.
For example, Crypto exchange Coinbase places a standard limit of £100,000 per day on GBP cash withdrawals, as the help article below makes clear. That sounds like a high limit – but consider those rare successful ‘crypto bros’ who made millions, only to realise after the fact that they will need to drip-feed it out of their accounts over a period of weeks before actually getting their hands on their full account value.
You can arm yourself with information about the liquidity of your account by reviewing the terms and conditions of an FCA regulated broker before opening an account.
3. Tax-friendly accounts
The stocks & shares ISA, which is only available to UK residents, is one of the simplest and most generous tax-friendly investment accounts in the world. Each tax year, UK investors can pay up to £20,000 into their stocks & shares ISA and enjoy exemptions from income tax or capital gains from the assets bought within that account, for the life of the account. (All tax rules are subject to a possible change in the future).
However, despite the attractiveness of these accounts as a wealth-creation vehicle, not all stockbrokers offer them. eToro, for example, only recently allowed their clients to open an ISA on their platform.
Therefore before you become wedded to a broker, have a look at the range of accounts they offer to check whether a tax-free solution is available. Using an ISA instead of a general account is a no-brainer if this account will be your primary method of long-term saving.
4. Behavioural nudges
This broker characteristic isn’t often covered by stockbroker reviews and it deserves more attention. It’s difficult to quantify, and therefore it often goes unnoticed.
A behavioural nudge is an encouragement to take an action that you otherwise wouldn’t.
Drawing from theories communicated excellently by Thaler, & Sunstein in their book Nudge: Improving decisions about health, wealth & happiness, nudging has become a standard tool in the corporate arsenal.
It’s the gentle answer to a perennial question posed by the leaders of stockbrokers; “How can we get our clients to do more of what makes us money?”
The answer – per nudge theory – is not to bombard clients with newsletters and phone calls to talk them into a trade but rather to create an investment experience that inherently nudges clients towards trading.
Consider the interactive investor pricing strategy, which centres around a core monthly fee that includes one or two trades.
Previously, a retiree may have left their account alone and never actively traded. But now that they are given a free trade or two each month – what’s the harm? Using these free trades, they may build a portfolio of shares at a low cost, but share portfolios require a lot of maintenance, such as rebalancing. Any rebalancing of a large share portfolio will require many trades in excess of the 1 or 2 monthly trades allowed, and so the investor finds themselves paying extra fees without really intending to.
This isn’t to say that the ii pricing model is deceptive, or even expensive. On the contrary, ii is one of our top picks for funds and large portfolios. But these little nudges encourage a trading behaviour that may have never occurred if all trades carried a cost.
Other nudges come in the form of gamification – the art of upgrading a dull brokerage interface to more closely resemble a gaming app, with frequent notifications, social media feeds and even on-screen confetti animations to celebrate the pricing of a trade. These changes are designed to increase general engagement and time spent on the app. This is done in the hope that the longer an investor spends within their brokerage environment, the more likely they are to actively trade.
5. Regulation and financial stability
It’s relatively easy to compare the regulations a stockbroker is beholden to by scrolling to the footer of their website or clicking on the ‘about us’ button that introduces the company as a whole. Reputable stockbrokers will usually state very prominently whether they are fully regulated by the Financial Conduct Authority.
For example, take a look at the overview that AJ Bell gives prospective customers browsing its website:
When you’re comparing scores of brokers, and getting lost inside fee structure comparison tables, it can be easy to lose sight of the most important question of all: Will my broker behave responsibly, does it have a strong reputation and is it fully regulated by the FCA?
While no retail investor will be able to look inside the inner workings of a firm, checking that a broker is full regulated is the simple way to ensure you’re working with a company that opens its books and processes to external parties who will perform those checks on your behalf.
Being regulated isn’t a guarantee that a brokerage will never fail, but should the worst happen, the collapse of a regulated firm will have better outcomes for clients than if a firm was unregulated.
That’s thanks, in part, to FSCS coverage, which acts like an insurance policy against firm failure, but it’s also due to FCA procedures requiring regulated firms to separate client assets from their own. This increases the likelihood that a brokerage business, along with all client monies can be simply transferred to another firm, ensuring minimal losses for investors (there may be some charge from administrators for this service), and continuity of service.