Investors need stock brokers to deal for them. But with so many options when choosing a stock broker. An investor often finds himself lost or even scared.
There is absolutely no reason to be in awe of stockbrokers, nor of the process of buying or selling shares. Stockbrokers need you more than you need them. It is a highly competitive business, with dozens of brokers offering to help you make a transaction – so much so that you can now deal for less than £10.
Choosing a broker means selecting the right combination of cost and services. The following selection criteria may help you draw up a shortlist of brokers and make a final selection:
Charges. Of course, the lower the commissions for trading the better, but you should allow for the possibility of improved service at extra cost. An important aspect of improved service is the effort put into ‘price improvement’ which is taking action to obtain better prices than the current bid and offer prices shown on the screens, through, say, haggling with a market maker. The charging structure will make a big difference to your choice of broker. For example, an investor who does not want to pay for advice and trades many times each month with bargain sizes of around £5,000 will prefer a broker who charges a low fixed rate regardless of bargain size, say £20 each time. Another trader, who buys and sells £1,000 of shares, may prefer a broker who charges a percentage of the amount of the trade, say, 1.0 per cent. If you are a buy-and-hold investor, with few transactions, commission costs will not be a great concern. But if you are very active the charges mount up dramatically. Then you may opt for the cheapest mode of transacting – usually online. This might be fine for the most liquid shares with narrow bid-offer spreads, but for infrequently traded shares the bid offer spread can be 10% or more and a telephone service broker might be able to negotiate a better price.
Location. The possibility of being able to talk to a broker face-to face may lead investors to favour a local broker. This can be particularly valuable for discretionary and advisory portfolio management, where the broker needs to know the investor’s circumstances and investing objectives. Local brokers may also be knowledgeable about companies in the region.
Contact. In surveys investors usually place the ability to contact brokers at the top of their worry list. There are many complaints about telephone lines being busy when a client wishes to deal. People can be put on hold for 20 minutes or more. This can seem like an eternity when you are trying to sell and the market is falling like a stone. Brokers are also criticised for not calling back when they promised to do so. Online orders are often executed very slowly at busy times, as the IT systems suffer from overload. Unfortunately, this is one of those factors that you do not really find out about until you experience it. However, it might be worth asking other clients of your shortlisted brokers if they have any complaints. It could be useful to be able to switch totelephone dealing if the online system is down, and vice versa. So consider a broker that gives you this flexibility.
Administration. The second factor most complained about is the quality of the administration. Record keeping is sometimes poor, as is the administration of dividends and taxation matters. The paperwork may reach the investor weeks after the event. You do not have to put up with this: other brokers are highly praised for the speed and efficiency of their administration.
Expertise. You need a broker who is well resourced, has access to high-quality external data and attracts talented managers. This is especially important if you are asking for portfolio management services. You do not want your nest egg managed by a graduate trainee trying to learn on the job. Ask what experience the firm has in managing portfolios of the type and size you have in mind.
Performance. Unfortunately, independently constructed league tables of portfolio managers’ performance are not available and so comparison is all but impossible. Brokers do provide statistics, but you must view them with caution.2 Recommendation may be your main hope.
Interest. Brokers hold money in cash accounts on behalf of investors. Some of these accounts offer miserly rates of interest, if anything. Those If you are likely to depositing substantial sums with a broker you need to ask what rate of interest you will be received prior to the purchase of shares. Also, if you need temporary credit, what limit will the broker allow you to go up to?
Adapted from the book: Financial Times Guide to Investing
I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk
investing is about making the right decisions, not many decisions.