Why your choice of stockbroker matters to your investment returns.
Some investors see their stockbroker’s choice as a quick administrative decision taken at the beginning of an investing journey.
This is far from the truth. Your stockbroker (or another investing platform) will be your investing partner for the long term. The terms and conditions you sign-up to will determine most of your investing costs over your investing lifetime. It is a big decision.
Yes, you can change stockbrokers, but doing so often requires you to pay a ‘transfer fee’ for each company share or fund you own. For some investors, this will total over £300 in fees, which places a barrier on any customer wanting to switch to a cheaper provider. It often means that even a broker charging £5 less per trade would struggle to tempt you away from your existing account because it still wouldn’t be worth it.
characteristics of a stockbroker
Therefore, given that you may be ‘tied’ to your existing platform for the foreseeable, it’s worthwhile making a very objective series of judgments about what you prioritize in a stockbroker before you make a decision.
This article will explain how different stockbroker account characteristics will impact your investment returns to help you prioritize the factors you’ll be looking out for when searching for the right account for you.
We can’t start on any topic except fees, as this is a clear way to differentiate different investment accounts from each other. You’ll usually incur charges such as:
- The fee to buy or sell domestic stocks and shares
- The fee to buy or sell international stocks and shares
- The fee to buy or sell local funds
- The fee to buy or sell foreign funds
- Fee to exchange currencies
- Fee for the operation of the investment account overall (also known as a platform fee)
Fees have a significant impact on your investment returns. For a start, each £1 you pay in taxes will reduce your portfolio value by £1; it’s as simple as that. Beyond this direct cost, you will also lose out on the investment returns you could have generated from that missing investment.
The effect of compounding means that a £1 spent now means your portfolio could be worth £2 or £3 less in retirement. It is a multiplier effect that works against us and focuses our attention on how important it is to keep fees low.
To calculate the impact of different fee levels between two brokers on your investment returns, calculate the annual difference in fees. Then, find an online interest calculator and input this figure as a regular yearly savings amount. Set the interest rate to your expected return on your investment portfolio (e.g., 5-7% for an equity-based collection), and hit calculate.
The resulting sum is the amount that your excess fees could have grown to if you hadn’t spent them. It represents the total expected benefit of choosing the cheaper broker.
I mentioned above that stockbrokers sometimes effectively tie customers to their accounts by imposing ‘transfer fees’ on any shares moved to another broker. Transferring shares requires administrative effort. Therefore I do not criticize stockbrokers for charging some form of fee to do this; however, sometimes the total fee can make it prohibitively expensive to change account, which I feel puts the brokerage industry in an anti-competition situation.
As a consumer, you would surely like to be able to swap and change at low-cost to take advantage of new deals, better pricing structures, or more unique features offered by other brokers.
Therefore, when researching stockbrokers, pay close attention to the fees relating to exits. Is there a close account fee, a transfer out fee? It’s worth discovering whether your favorite brokers all charge similar amounts or whether one is much cheaper.
Transferring out is only a hypothetical scenario – you might never feel the need. Therefore this isn’t as high priority as trading fees and account fees, which you certainly will be incurring.