The phrase ‘separating the wheat from the chaff’ is an idiom which refers to picking out the desirable & high quality elements from the less valuable elements.
As new investors, when we compare the potential stockbrokers in the UK market, we also need to separate the wheat from the chaff to create a focused shortlist of potential best buys before we can focus on the minutiae and detail and select a stockbroker. How can we do that?
Even better – how can we do that, without relying on editorials and reviews which may be biased by commissions paid by stockbrokers to encourage websites to direct you towards them?
This article will explain how you can apply simple principles to separate the top stockbrokers from the mediocre ones, and find the right stockbroker that will fit well with your investing style.
Reputation only gets you so far
Like with any consumer product, a sensible place to start would be reputation. Which stockbrokers are the largest players in the market, and which are the most well known?
It’s instinct for us to stick to, and trust, the institutions that are familiar. However this only goes so far in services such as stockbroking.
For example – will reputation alone improve your investment returns? Well, your investment performance is going to be driven by your underlying holdings, not the account you’re holding them in.
And does reputation translate into low (or at least ‘fair’) fees? There’s no guarantee of that.
For this reason, I would advise against drawing up a shortlist on the basis of which companies you’ve heard of or seen before. Don’t be tempted to use ‘reputation’ as a shorthand or replacement for ‘real’ factors that you need from a stockbroker.
If you want low fees, look for low fees specifically.
If you want financial stability, then look at the strength of the companies.
Reputation is a poor proxy for any of these specific criteria, so it pays to have a laser focus on what you need from a stockbroker.
Is marketing in your interest?
You may feel tempted to look up the stockbrokers you’ve seen in print, such as in the Financial Times, or online. However do consider the funding of this marketing.
Marketing isn’t cheap, and therefore the stockbrokers that take out extensive print and online advertising will need to generate more revenue to cover that expense.
On the other hand, a stock broker or share dealing service with minimal overheads and which relies upon word of mouth, can compete better on price due to its lower cost base.
For this reason, it’s worthwhile to research deeper than the initial brands that ‘come to you’ as a consumer.
Bear in mind that it usually costs money to appear on the first page of Google, whether it’s as an advertisement or not, therefore dig into the second and third pages of results to find some potentially cheaper alternatives.
What should you look for in a Stockbroker?
If reputation doesn’t allow you to separate the wheat from the chaff, which are the most useful factors to look at?
The total cost of account fees
This is difficult to calculate, as you will want to estimate the total account charges, management charges and trading fees (along with any other fees that might apply depending on your account).
It might be fun to use a stockbroker that was recently founded and is disrupting the industry – but is its funding secured for the long term? You may wish to narrow your search to providers that you are confident are profitable and have a sustainable business model.
User Interface and Charts
This will matter a lot more to day traders than to buy-and-hold investors. The level of pricing data and charting varies hugely between brokers and is one of the easy ways to differentiate the service. It can be difficult to compare stockbrokers by user interface based on limited screenshots, but you can probably view a comprehensive walk through on YouTube for any major brokerage firm to get a better view.
Trading and other investment options
Some investment platforms only allow the purchases of a limited number of domestic shares. Others allow you to buy practically any traded financial instrument on global markets. As a new investor, you will probably only need the tip of the iceberg, but some services are surprisingly restrictive, therefore you should always check that brokers actually offer the investments you were looking for.
I hope that this article has helped to refine the factors that you will consider when looking for a stockbroker.