How To Choose A Broker
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‘Look at my screen! Look at my screen’ – said Billy.
He was so excited to show Jack that he’d started investing: ‘I’ve finally figured out this investing thing. See!? Can you see it! I invest £20 every month.’
‘Oh yea? What broker is this? Replied Jack’
‘What’s a broker? This is my bank, I use my bank to invest, it’s so easy! How did it take me so long to figure this out!’
‘Jack replied – Do you know how much your bank charges you to place a trade?’
‘No, but well it’s not much – look! Look, see how much I’ve saved up!’
*Pulls out iPhone and Googles* – ‘Billy the Banks official website tells me their fee is over £10 per trade, that’s over 50% of what you’re investing. Your investment will have to increase in price by 50% just to allow you to break even.’
‘50% replied Billy! You gotta be kidding me?’
‘No, look it’s right here, replied Jack.’
Just interested in seeing a comparision table? Hit the link below to discoer the resource I use myself when comparing brokers:
Don’t be blinded by fund choice
Pretty much any personal finance book contains at least a chapter on why you need to pick low-cost funds.
In Tony Robbins book – Money Master The Game, Tony explains how a fund fee of 1% vs 3% can result in a final nest egg difference of between 50-70% (at the time of writing the average mutual fund fee is 3.17%).
The following chapter usually goes on to recommend index tracker funds as a way of avoiding high charges – typically Vanguard.
In the UK unless you’ve got £100,000+ you can’t buy direct. Furthermore, even if you did buy direct you could miss out on wrapping some of your investment in an ISA (a major tax advantage depending on your circumstances).
Is your current broker milking your profits?
That’s right, you have to purchase through a middleman who takes a slice of your already squeezed profits – Mr Broker and if you’ve read a few more chapters of that personal finance book you’ve probably also been sold on pound cost averaging so you’ll likely be purchasing a monthly contribution rather than a lump sum.
The most obvious choice for most is your bank, yet if you’re investing small amounts every month <£1,000 the chance is they’re just about the worst choice you could make.
Yet if you’re like my friend above you probably merrily skipped the small print and are none the wiser on the fact that your bank is making far more money from your investment than you could hope to make.
What’s more when my friend checks to see the share performance he may see a positive return when in reality his total return is negative (due to the trade cost not being taken into account on the stocks performance report) leading to a whopping false sense of security.
So how can you be sure your broker isn’t stripping your chance of profits? Who should you turn to?
Step 1. Identify your requirements
A lot of early investors approach investing like buying a house – they start with a neighbourhood (broker) and then go on to choose their house (investments) however an opposite approach is best as often certain brokers only offer a limited selection of investments.
1. What will you be investing in?
Before getting to the stage of identifying your new broker you should already have decided on your risk threshold and laid out a portfolio you are planning on investing in. Due to the nature of brokers, some are better suited to others depending on your planned investments. So set this out first.
2. How will you invest?
Next, decide how you plan on investing in your chosen investments, will this be an on-going commitment or have you recently inherited some cash and are looking at a lump sum investment? Or perhaps you’ll be doing both.
3. How much you invest?
Finally identify the exact figure you’ll be investing each month, as certain platforms are more suited to smaller investments, whilst others offer bonuses to bigger portfolios.
Step 2. Identify a broker who can provide these funds
Now you have your list of investments you can go out and discover which brokers offers these investments – communities such as The Lemon Fool, Financial Independence London and r/UKpersonalfinance can be great places to discover this information.
Step 3. Analyse all costs
Thus if you’re investing a small amount on an on-going basis platforms which take a cut will likely provide a better choice, whereas if you have a single lump sum a platform which charges a one-off fee will likely be the best option.
Step 4. Look for reviews
Before jumping in I would suggest looking for recent reviews of the company (ideally including some offline reviews) furthermore I’d contact their support to see how responsive they are.
A broker may charge less but if it takes you ages to get your money out and they have had some bad press – is it worth the risk?
To conclude we’ve covered the story of Billy and why he was losing money, despite what his bank told him.
We then discovered why many personal finance books can be missing the point when they focus solely on fund charges before going step-by-step on how to identify the correct broker for your needs.
So what’s next? Click here to discover the exact place I go to compare all brokerage fees (I even mention a popular broker who recently overhauled the way they charge) to decide if it’s worth switching, see you there.