If you’ve been comparing stockbrokers against one another online, you’ve probably noticed a stark difference in the fees they charge.
Some stockbrokers charge just £4.95 for a share trade, whereas others happily charge £13.95 to buy a share.
The trade itself is exactly the same, so this level of price difference doesn’t feel sustainable. How does the more expensive broker justify this pricing difference? If a restaurant sold the same food as its next door neighbour but charged 2.5x more, you wouldn’t expect it to be overrun with customers.
And yet, in the UK stockbroking market, you’ll find that both the high and low trading fee platforms have plenty of customers. Just what exactly is going on here?
I’ll explain in this article which will talk through three reasons why stockbrokers charge very different fees to each other.
Food versus drinks prices – the constant margin
The first point to consider is that the price list of a stockbroker is very much like a menu. Most customers will incur at least two or three fees by joining and placing simple trades:
- An account or platform fee
- An FX currency conversion fee
- A trading commission
If you compare fees individually (which stock brokers certainly do), you will see huge differences line by line. But what you may start to realise is that when a broker discounts one fee, their other fees are higher.
This is just like when restaurants offer a bargain lunch menu or special discount coupon, but continue to sell their drinks at a high margin. The food effectively becomes an enticement to enter the venue, and once seated, you will still provide the restaurant with a healthy margin via drinks purchases instead.
In the case of stockbrokers; a broker which offers very cheap trading fees could have high quarterly account fees which cannot be escaped. In contrast, a stockbroker which apparently has higher trading fees, may waive their platform fee completely if the customer has an account worth over £100,000 or if they place one trade a month.
The different cost base of different business models
The second thing to appreciate is that many of these stockbrokers offer a similar service on the very surface (they allow you to buy shares), but their organisations are built very differently.
A robo advisor firm will have a huge team of coding specialists, working with investment advisers to build algorithms which automated the management of client assets.
Meanwhile, a fund supermarket may have a large relationship team involved in outreach to different fund providers to build relationships with them on their platform.
An online-only share dealing service may have a small staff that only focuses on keeping the core service running.
The differences in cost bases can be absolutely huge. Also, due to economies of scale, smaller firms will find it harder to cover their fixed regulatory, IT and property costs with the discounted fees charged by huge competitors.
Catering to the many versus the few
Finally, as with any business, you will find that stockbrokers have an unstated preference of customer type. You will see this by the way they structure their fees.
A stockbroker which charges a platform fee based as a small % of assets will attract new investors, because this is very favourable to those investing a small sum (Small sum = Small fee).
A stockbroker which charges a high minimum fee which is capped at a fixed level will attract large investors, who will see their fees shrink as a % of assets the more they invest.
Each type of customer brings a different mix of revenue. Lots of small investors will place lots of trades, whereas fewer larger customers will be cheaper to service as volumes will be lower. It’s a strategic decision of the stockbroker as to which customers they want to target, and they will set their prices accordingly.