Comparing Stockbrokers in The UK: Easy or Hard?

stockbrokers


I’m often asked how difficult or easy it is to find a good stockbroker in the UK. Is the marketing a smokescreen that disguises bad providers from good? Or has the UK regulator ensured that all stockbrokers in the market are reputable and deal with complaints in an effective manner? 

The answer might surprise you: it is difficult, but not because of the existence of cowboys

What makes comparing stockbrokers difficult?

Comparing stockbrokers is tricky because stockbrokers come in many shapes and sizes. 

Back in the 1980s, there was only one form of stockbroker: a full service firm. 

Full service brokers were a friendly voice on the end of a telephone, who would both advise you on trades and execute them for you. Buying shares with a full service broker was as easy as holding a conversation with a friend over a beer. 

This wasn’t however a particularly efficient way to buy shares. After all, each trade required a conversation with a well paid professional. Stockbrokers also spent a lot of their time ringing clients to encourage them to place a trade and earn themselves a commission. This meant that the fees or commissions paid to stockbrokers to execute a trade, had to cover:

  • The underlying transaction fees paid by the stockbroker firm to execute a trade with the stock exchange
  • The wage of the stockbroker for the time they spent executing their trade
  • The wage of the stockbroker whilst they rang various other clients (and eventually you) to actually earn the trade. 

This was not a particularly cheap way to run a transactional service, therefore a new class of stockbrokers emerged called discount brokers or ‘execution-only’ brokers. 

These organisations ran themselves like well oiled machines, designed to execute trades at the lowest cost possible. This meant spending less money on marketing, and in particular – keeping the traders at their desk doing the job of executing, rather than cold calling their client list. 

This led to the fixed price of buying shares falling quite considerably. This competition also led to full service brokerages offering an execution-only service too, alongside their full offering. 

Soon, execution only was the default way for armchair investors to place trades. Investing costs have a big impact on the investment returns of investors – particularly small ones – therefore this makes a lot of sense. 

Change was afoot once more in the late 2000’s and early 2010s when a new wave of online-only brokers emerged. Online-only brokers slashed trading fees again – to lows of £4.95 per trade, in exchange for the customer dealing electronically with the platform, cutting out the human interaction altogether. 

How the colourful history of brokers leads to current confusion

Now to bring us back to the original question – why is comparing a stockbroker against another difficult? 

The answer is that by 2020, there are now about 5-6 different forms of platforms. Not different platforms (there are over 50 of those), but different types. 

Each type comes with its own distinct combination of features, which influences the overall platform cost, and the value of other fees (such as trading fees), charged by the broker. 

The different types are: 

  • Full service broker
  • Execution-only broker
  • Online-only share dealing service (Restricts customers to specific types of investments)
  • Fund supermarkets
  • Money-tracking apps with automated investing
  • Robo Advisor platforms

There is no rigid definition of each type, so you’ll also find conglomerates that straddle several borders between these categories. 

My point is that with such a wide range of offerings, it’s no longer fruitful to simply compare the platform and trading fee of each broker to determine which offers the cheapest service. 

For the same reason, it’s pointless to compare on reviews alone – as the users are rating different offerings and will hold some to a higher benchmark than others. An online-only share dealer, for example, will offer a very stripped back interface and limited customer support – but customers will be willing to accept reduced service in exchange for the tiny commissions. 

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