Business

What Should You Look For In A Stockbroker?

Stockbroker!! When exploring the list of potential stockbrokers in the UK, you will probably be overwhelmed by the sea of choices. 

About ten years, ago there were only a host of viable, online brokers that would meet the needs of a cost-conscious investor. 

Now, I can count 30 without even trying. 

Fortunately, there are websites online which exist to help you compare different stockbrokers and look at how their service, history, and fees compare. 

But which of these is most important, and what else should you look for in a stockbroker?

Capitalization and sustainability of the business model

One reason for the vast number of brokers online is the recent culture of ‘start-ups’ has led to new challenger brokers setting up and running at a loss for substantial periods in order to finally get a foothold in the market. 

Backed by private equity or other private investment, these businesses can preserve a business’s capital requirements under very challenging circumstances without needing to fold, as their cash supply is rich and stable for the short term. 

The keyword there is ‘short term’. A private equity house or venture capital firm does not have an infinite supply of money. Their original investment case would have been based on a few scenarios ranging from champagne-cork popping success to a more moderate windfall. If the business fails to perform in this range for an extended period of time, the backer will need to eventually give up and turn-off the cash taps, and either sell the business or wind it down. 

While the existing regulations ensure that a stockbroker sale or wind down won’t leave customers worse off, it will be an inconvenience for customers to be transferred to another broker. Usually what happens is that a broker will transfer their entire customer book to another broker in return for a fee.

This ensures continuity of a service… but what service exactly? The new broker is under no obligation to match the performance or pricing of the old broker, therefore new customers may suffer price rises or changes to service. 

This is why the sustainability of a broker’s business model is an important factor for me. I always perform research to answer one simple question: is the stockbroker making money? 

Somewhat perverse sounding, I know, but I want to know that the stockbroker is making money off me. Because with profits comes security. 

Fee Structure

Assuming that the broker has a sustainable business, I next turn my attention to the fee structure of the broker. 

I don’t care about one particular fee type. Platform charges, FX charges, trading fees – they’ll all hit me with varying frequency over my account lifetime, so I’m interested in them all. 

I attempt to model an average year of holding my account. I ask myself: 

  • How many trades do I make? 
  • What will my account value be?

I use this information to try and calculate the cost of the stockbroker to me personally over a typical year. Unfortunately, this is too complex to be able to quickly see from a glance at a broker comparison table. But I can usually gauge quickly whether or not a broker has a chance at being competitive from a quick look at the platform fee and trading fee. I only run the numbers on the top 3 brokers. 

Service level

The level of customer service is honestly not a massive factor for me personally. Under FCA rules, brokers must treat their customers fairly, therefore to some extent, I feel like brokers have mandatory minimums on customer service. 

I have used customer service a couple of times in the last few years for my stockbroker account, such as when my stockbroker incorrectly executed a request to sell part of my holdings to transfer out (by selling everything). 

The customer service team was apologetic, and management assured me that if the market was to rise whilst I was out of the market, they would compensate my account to put me in the same if not better position. This was very well dealt with and I felt satisfied with the level of service. 

It’s examples like that – with potentially large amounts at stake, which demonstrate the need for good customer service. However I simply don’t hear many horror stories about brokerage firms, and therefore I don’t use this as an important part of choosing a stockbroker process. 

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