The stockbroking industry has been through several phases of change since the year 2000. First it was the rise in online trading, then the regulatory changes banning brokers from collecting commissions from investment providers. Finally, the 2010 wave of private-equity backed start ups has meant that established providers have suddenly been overwhelmed by a tide of new competition.
Amongst this change, how have we fared as individual investors? Is it easier than ever to pluck a good stockbroker out of the marketplace, or is it harder than ever to find the best broker?
I’ll examine 5 factors which have experienced distinct change over the last 15 – 20 years, to explain why it’s sometimes easier, and sometimes harder to pick the perfect broker compared to back then.
Easier: Stockbroker comparison sites make comparing different accounts easier
Alongside the online offerings of stockbrokers in the last 20 years, a new breed of comparison website has emerged; the stockbroker comparison services.
These typically exist on finance comparison websites which also capture savings and loans, but the broker page is by far the most useful to an investor.
A broker comparison will typically look at the brand & reputation, the types of trades allowed, and the various fees that the account will charge. As you’ll read about below, the fee structures of brokers have become more complex. Therefore in response, stockbroker comparison websites tend to quote 2-3 different fees on their main comparison tables.
These sites usually include a link to the stockbroker which may generate a commission for referring you to the stockbroker. This gives rise to conflict of interest and impartiality questions about these services.
Are their listings complete? Probably not, as they tend to prefer to list only the brokers who will pay for a lead. However, these sites still helpfully gather together comparable information on a portion of the market, which helps!
Easier: Fees are lower but standard of service is generally high
It’s fair to say that across the board, the fees of stockbroker services have fallen while service quality remains high. This is because of economies of scale, coupled with steady regulatory requirements set by the FCA (in the UK).
Harder: There is now more players to choose from
Particularly in the last 5 years, many new services have emerged which usually call themselves ‘investment platforms’, ‘share dealing services’ or even ‘robo-advisers’.
These platforms tend to focus on one of two niches:
- Ultra low cost
- Super user-friendly
This appeals to the veteran investors or novice investors respectively.
Harder: There is a wide variety of services
With new platforms attempting to differentiate themselves, comes a more more varied series of propositions.
Long ago, virtually every stockbroker offered the same traditional services. It’s now not uncommon to bump into new offerings, or limitations you may not have been expecting. For example:
- Some investment platforms only allow purchases of domestic shares
- Some investment platforms only allow the purchase of funds
- Some accounts only allow you to invest in the funds of a single provider
- Some accounts don’t allow any individual investment decisions (robo-advisers)
Harder: Platforms fees make comparing costs trickier
Since commissions from fund managers were abolished, stockbrokers needed to levy a new fee on assets to compensate for their major revenue line being zero’d out. This was where the platform fee came in.
Some stockbrokers have always had a platform or ‘account’ fee, but others did not, and subsidised their low-trading customers with the commissions earned on other customers who opted for expensive mutual funds.
Now that this periodic fee exists, you will need to carefully model the total cost of trading and holding the account to reach a comparable figure to use when weighing up the cost of different providers.
Overall, the quality of stockbrokers remains high. The increasing automation in services increases the consistency of the experience across platforms.
However, fees can vary significantly, and the different ways in which price menus are created means that some stockbrokers are certainly suited to certain investor types, therefore it’s important to find the right match. You will also need to look out for restrictions, as you can no longer assume that an investment platform will allow you to invest in ‘everything’.