Stockbrokers come in many shapes and sizes. There are the expensive boutique firms that offer a chat and tips over the phone before you trade (£££), and there are the low-cost ‘share dealing’ websites which give you little more than the bare minimum functionality of a stockbroker account from an equities perspective.
Then there’s the fund supermarkets, which specialise in the UK’s favourite investment vehicle: funds. While these accounts cannot be used to buy direct investments into companies, this doesn’t bother many investors who lacked the time to individual research company shares anyway.
And we haven’t even reached the web 3.0 variant of broker known as a ‘robo advisor’. Effectively placing each customer into a bucket, with a time horizon and risk label and allocating them a pre-designed package of funds, these robo advisers command medium fees and demand very little of an investor beyond a debit card.
Which stockbroker is a match for passive investing?
The goal of passive investing is to achieve the average return of the market.
This sounds like a very modest goal, but actually if an investor actually receives the market’s average return, they’ve done better than most.
This is because the average stock market return is measured before fees. Therefore while you might assume that 50% of investors sit above this line and 50% sit below, the truth is that once stockbrokers, fund managers, financial advisers and the tax man have all had their cut – very few investors are still sitting above the average. The average is a win.
Being successfully passive requires two things:
- An investment portfolio which mirrors the overall market
- An ultra-low cost structure which allows the investor to keep most of their returns.
It’s worth comparing stockbroker types from these two lenses to understand which fits the passive approach best.
Full service brokers are full fee brokers. They charge for services that a passive investor simply doesn’t want or need – stock picking advice is not necessary if you’re essentially investing in every company in the FTSE 100.
Fund supermarkets are quite restrictive, as many don’t allow any equities or corporate bonds to be directly held in the account. This doesn’t particularly bother passive investors, who tend to prefer unit trusts, open ended investment companies and investment trusts anyway, as these offer a low-cost route into a very diversified collection of companies.
Online-only share dealing services are also a potential winner – as they are designed to offer trades at the very lowest cost. They certainly give fund supermarkets a run for their money. Which type is cheapest often comes down to a close comparison between the fee structures of each account and running the maths yourself.
Robo-advisers are not optimal platforms for passive investing. The entire setup includes an element of active management. Your funds might ultimately be invested in ‘index trackers’ or other passive funds, but the robo adviser layer of management in the middle is effectively an element of active management. Not only does this go against the passive approach, but it also adds a layer of cost. With a robo adviser account, you effectively pay for both the underlying fund management charges AND the robo adviser active management at the same time.
So in conclusion, the fund supermarkets and online-only share dealing services are probably the closest aligned to the passive investing mantras of matching the market return. You can probably build identical portfolios of funds in both, so the main question to ask is – which stock broker account can do it for the lowest fee?