What is a broker
A broker is a firm that acts as an intermediary between an investor and a securities exchange. Because exchanges only accept orders from brokerages and firms who are members of that exchange, individual investors need these services of exchange members.
Brokers provide that service and are compensated in various ways, either through commissions, fees or through being paid by the exchange itself.
As well as executing client orders, brokers can provide investors with research, investment plans and market intelligence, though as an investor we may pay more for such services.
There recently has been an explosion of discount brokers which are allowing the everyday person to access the markets and trade at a lower cost. These discount brokers trade on behalf of a client (investor) but do not typically provide investment advice or research.
Now you have an understanding of what a broker is, let’s get down to choosing a brokerage.
What to look for
As previously said, brokers come in all shapes and sizes. When it comes down to picking the right brokerage for you also comes down to how you want to invest. This is another part of understanding how your personal finances, risk tolerance and goals can all affect the kind of broker that you choose in the end.
Questions to ask when looking for a brokerage
- How much do I have to invest?
- Do I want to invest automatically each month?
- Do I want to invest simply or have lots of investment options?
- What are my goals for investing?
- Do I want a full-service broker or a discount broker?
- Does this brokerage have protection and is regulated?
|Platform||Accounts||Annual Platform fee||Fee notes||Dealing funds||Dealing ETFs & shares||Regular investing|
|Trading212||GIA & ISA||£0||£0||–||£0||0.7%|
|Freetrade||GIA, ISA & SIPP||Basic £0/M|
|Vanguard||GIA, ISA, SIPP & JISA||0.15% on the first £250,000, 0% thereafter.||Investments are restricted to Vanguard funds and ETFs.||£0||£0 fixed daily times, £7.50 to trade other times.||£0|
|AJ Bell||GIA, ISA, SIPP & JISA||0.25% on the first £250,000 of funds.||Tiered charge e.g. 0.25% on first £250K then 0.1% on next £750K etc||£1.50||£9.95||£1.50|
|Fidelity||GIA, ISA, SIPP & JISA||0.35% on all assets worth £7500 – £249,999.||Assets under £7500 = £45 p.a. or 0.35% with a monthly savings plan||£0||£0||£1.50 (no charge on funds)|
|Hargreaves Lansdown||GIA, ISA, SIPP & JISA||0.45% on the first £250,000 of funds||Tiered charge. You pay 0.45% on the first £250K then 0.25% on the next £750K etc||£0||£11.95. Funds free to invest||£1.50 (not charged on funds)|
|InvestEngine||GIA, ISA||£0/0.47% (6)||£0||£0||£0||£0|
*These numbers change time to time and will be updated if needs
You will see with some of these brokers that they can vary in how the fees are structured. Here we are presented with brokers which offer flat fees, % fees and lastly commission-free brokers.
It is normally said that if you are beginning investing with a relatively small sum of money then you may find a percentage fee platform is good. Compared to larger portfolios such as £20,000 and up look towards a flat fee broker.
Obviously, commission-free brokers offer the best value from the first look but such brokers can sometimes become more expensive when taking into account the spread between the buy and sell price of a stock.
If you are an investor who wants simple choices, investing in ETFs for the long term, vanguard is a good choice to research. Though you are locked into only using Vanguard funds.
Having low fees is great as it can help long-term growth when keeping them low, but there are other risks, such as the company going bankrupt. It is rare but does happen which is why there are a few extra steps we can take to reduce risk to our long-term portfolios.
Here in the UK, we have protection when it comes to financial firms. FSCS is what you as an investor want to look for when checking out financial firms.
FSCS protects you when these financial firms fail. If the firm that you use goes out of business and they can’t pay your claim, then they will step in to pay compensation.
If the financial firm you use goes out of business then you can be compensated up to £85,000 per eligible person, per firm.
Also looking into protection it’s good to look at whether they are authorized by the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).
These can be looked at as a seal of approval and thought to act more responsibly.
User interface when looking into a broker can make or break for some, not only that but also how you can access your broker. Some investors like using their phones and others like using a computer. But we find that some brokers are limited and only offer apps for the phone or vice versa. Some brokers can be rather confusing with lots of buttons, and features or purely confusing. You have to find the right balance for yourself.
Taking the brokers above for example we find as of 2022 Trading212 offers mobile and computer access to your portfolio with a simple layout. We find that Free trade also offers a simple layout but is only accessible via mobile but currently has a Beta for the Web platform.
On the other hand, we have brokers like Hargreaves Lansdown which can be accessed by both but can be confusing at times with the amount of information it can offer.
Get what you pay for
Like anything else, we don’t like when things go wrong. Whether that be with your computer or accessing your bank. Likewise investing can come down to “you get what you pay for”. Some brokers charge higher fees than others, but these fees can balance out with the kind of service you receive as an investor.
Having access to a representative who knows what they are talking about can be worth its weight in gold.
Here is a great article which talks about some of the best UK platforms:
Mentioned are IG, IB, Saxo, HL, II, Barclays, AJ Bell, Lloyds, eToro, DEGIRO & Halifax.
Choosing a brokerage
When you are choosing a brokerage it is key that you make a checklist of what your goals are and find a brokerage which ticks all your boxes.
Some of the most common and popular brokers around the UK are Trading212, Freetrade, Vanguard and Hargreaves Lansdown.
If you are curious about the type of account you may want for your specific goal. Check out our article about the 4 types of Investment accounts. This may help point you in the right direction to start your investment journey.