Why Are Stockbrokers So Expensive?

Why are stockbrokers so expensive? Stockbrokers and investing platforms can sometimes offer what feels like a pricey service. With user-friendly self-service tools to place trade orders yourself, it seems like a stockbroker is doing very little to earn a sizeable fee from clients. 

Furthermore, stockbrokers often charge a platform or administration fee which applies regardless of whether you trade or not.

How expensive are stockbrokers?

Before we explain the factors behind the price, let’s first look at how expensive the best UK stockbrokers actually are. Below, we’ll compare the prices of the largest UK stockbrokers. The fees quoted below will be the charge to buy 100 shares of a UK FTSE 100 company.

In descending order, the standard online trading fees for the biggest UK stockbrokers are:

Prices were accurate on 16 September 2021 at the time of writing. 

Why are stockbrokers so expensive?

1. Regulation

All large UK stockbrokers that serve UK clients are registered with the Financial Conduct Authority. This isn’t a one-off form-filling exercise. It’s a significant ongoing regulatory burden that results in additional costs for the firm. 

There are countless rules and regulations that the best FCA regulated brokers must comply with, ranging from risk-management practices, appointing more qualified people, and controlling advertising & marketing to a higher standard. 

FCA regulation permeates through the business processes of a firm. This makes UK stockbrokers some of the safest and most reputable brokers in the world. But it also prevents them from being cheap. 

The impact of this regulation is to increase the general overheads and cost burden of a firm. It must recover these costs through the fees it charges to remain profitable. If the cost of regulation is £5,000,000 per year for a large broker, and its clients make 10,000,000 trades, then that’s an extra 50p per trade that needs to be recovered. See our detailed guide to stockbroker regulation in the UK for more info.

2. Cutting out the people sometimes means replacing them with different people

Modern online brokerages are efficient machines that don’t employ as many staff as they once did. In the 1980’s, clients needed to ring up a broker and order shares via a human on the other end. The broker would also need to execute those trades in a far more labour intensive way. This meant that share dealing in the 1980s was even more expensive than it is today. 

However, the replacement of human interfaces with speedy websites doesn’t completely remove cost from the operation. Broker websites need to be:

  • Clear
  • Effective
  • Error-free
  • Secure

These need to have bank-level security and in the brokerage business, any downtime or errors could cost a broker a serious amount of money.

The technology extends behind the website, as a stockbroker’s work isn’t done until it has processed your trade on the London Stock Exchange (if it is a member broker) or via an intermediary. This involves a separate back-end system to record and execute these trades.

This means that stockbrokers need to employ an army of website designers, security consultants and IT personnel to keep the site online. 

The result of all of this brainpower is a website that feels easy to use and appears to process trades in an instant. This is fantastic for consumers and makes share dealing very quick, but again this large annual IT spend needs to be recovered through dealing fees.

3. Stockbrokers need to pay trading fees themselves

As a stockbroker, trading isn’t free. Therefore not all of the share dealing fees you pay is gross profit for the stockbroker to cover their overheads. 

Instead, member stockbrokers who trade directly on the London Stock Exchange need to pay an annual membership charge. Many stockbrokers don’t even have a seat at the LSE, and actually route their orders through a third party broker who does have direct access to the market.

Of course, your retail broker will pay much lower dealing fees than you, but this is still an element of cost which limits the lowest price a broker can offer you while still turning a profit. 

Our reviews are clear about broker fees

In our stockbroker reviews, we focus on different categories of fees to allow for a useful comparison. Our best stockbroker award will usually be awarded to the UK stockbroker which offers the most compelling fee package.

When it comes to crowdfunding platforms, fees can be even higher due to the higher costs of transacting in private markets. In our Funderbeam review, we draw attention to the low fees offered by Funderbeam and competitive fees in the larger players in the UK crowdfunding market.

On reflection: are stockbrokers actually expensive?

When we hear the question of why are stockbrokers expensive, our initial reaction is actually to push back. 

Based on the current pricing of the best Stocks & Shares ISAs and investing apps, you can place a £50,000 share trade and be charged as little as £6 from a convention stockbroker, or even zero commission using eToro (read our review).

In the 1980s, stockbrokers charged up to 1% of a transaction value. On a £50,000 share trade this would be a whopping £500. That’s almost 100x more expensive. Of course, any investors under the age of 40 won’t have this pricing in memory to make a comparison. 

Investing apps such as eToro are also allowing investors to invest with more modest lump sums, such as investing £1,000 across a diverse range of shares. The costs of trading used to make this prohibitively expensive. 

Many investment platforms allow you to sign up with as little as £50. Our list of the minimum deposits to open stocks & shares ISAs shows that some even allow you to start with £1!

Whether the economics of this pricing model makes sense is a decision for these bold brokers, but for the time being, this can only help new and young investors begin their investing journey.