How to choose a broker

Thanks to countless Hollywood films, for many people the idea of investing in shares evokes images of guys in red braces screaming “Buy! No – sell!” into their mobile phones.

But who’s on the other side of that phone? Who is actually doing the buying and selling of these investments? It’s their stockbroker.

And if you want to do any investing, you’re going to have to get yourself one.

But don’t worry. It’s a lot easier and a lot cheaper – although much less glamorous – than it might sound.

A stockbroker is simply a company that buys and sells shares (or bonds) on your behalf, and looks after them for you.

Some brokers will offer advice on what to do (‘advisory brokers’), but it’s more expensive, and we’d argue, not worth it. You have enough people screaming at you what to buy and sell each day – don’t add yet more noise into the mix.

So we’ll be focusing on ‘execution-only’ brokers. All this means is that you give your broker an instruction, and they ‘execute’ it for you. They’ll charge you a fee for this, of course.

So how do you go about choosing the right broker? Here are the factors to consider.

Do you want the option of dealing by telephone?

More and more share dealing is being done over the internet. It is cheaper for both the broker and the customer. Websites also tend to offer much more information than talking to someone on the telephone – most brokers offer as many charts, analysis and news functions as you could need and more.

Even so, it is usually a good idea to use a broker that offers both services. Some trades in certain investments may have to be done over the telephone. Plus, it is always good to talk to someone if you need help or are a little unsure of something.

What are the charges?

How much will it cost you to trade? Online deals are usually cheaper than telephone trades. Remember that you’ll pay for both buying and selling.

Also, consider how often you will trade. Bear in mind, as we’ll see later in this series, that you should usually aspire to trade as infrequently as possible. Over-trading is a common mistake among investors, and it’s an absolute killer for your portfolio, as those costs add up.

Of course, brokers only make money when you trade. So they’d rather you did it a lot. That means you should watch out for things like ‘inactivity fees’, where you get charged unless you make a certain number of deals per month or per quarter.

Also look out for annual management charges on products like self-select Isas and self-invested personal pensions (Sipps). These are usually based on a percentage of the value of your investments.

Unless the provider is giving you investment advice or managing your investments, then these fees really should be capped at a maximum annual amount. If they’re not, look elsewhere.

And watch out for any ‘exit’ fees. You may wish to change brokers if you find that the service doesn’t suit you any more, and it’s worth knowing if this will end up costing you.

Many brokers also offer dividend re-investment options for the top 350 largest UK stocks – these automatically re-invest your dividends when they are paid out, for a small fee.

These are great if you are looking to compound your investments over time. Many studies show that the re-investment of dividends is the biggest contributor to long-term returns from the stock market.

What do you want to invest in?

More and more investors are waking up to the fact that investing is not just about stocks, or about investing in companies listed in London. So when choosing a broking account, make sure your provider can offer what you want to buy.

Look for the ability to buy and sell shares in European, US and Asian stock markets (as well as charges); corporate bonds and government bonds.

It’s also worth considering whether you’ll get paid any interest on cash that is sitting in your account waiting to be invested – these sums can be substantial at times.

How does your broker hold your shares?

Most brokers offer what’s known as a nominee service. These accounts make it much easier for your broker to collect dividends and deal with company specific actions on your behalf.

For example, say you hold shares in BP. Your broker will hold all your BP shares and those of its other customers in a separate BP ‘nominee’ account. Your allocation of BP shares will be clearly identifiable within this account.

Shares held in such accounts are also ‘ring-fenced’ from a broker and cannot be touched if your broker goes bust.

One downside is that, because nominee accounts are technically held in the name of the broker, you may not get automatic access to the shareholder ‘perks’ offered by some companies, or the right to attend shareholder meetings.

If this matters to you, then check with the broker before you open an account. You can find certificated share-dealing services, where the stock is held in your own name. However, these are more expensive, and for most small investors, we’d argue unnecessary.

How safe is your broker?

Nominee accounts cannot be used to pay the debts of the broker, so they should be safe if your broker goes bust.

However, always check that any broker you use is regulated by the Financial Services Authority (FSA) and is a member of the Financial Services Compensation Scheme (FSCS).

This means that if something serious goes wrong – for example, your broker goes bust and it turns out that it hasn’t kept your money separate from its own (which has happened in the past) – then the FSCS can pay out compensation.

The maximum compensation on broking accounts is £50,000. Cash deposits in a bank are covered up to £85,000. Pension accounts are covered up to 90% of value with no upper limit.

You may also want to find out who actually owns your broker. Well-known banks or financial services firms own many high-profile brokers. Whilst many smaller, less known brokers do a good job, you may sleep better at night going with one of the bigger, well-funded providers.

What to do now

Start researching! Take a look at our broker comparison table as a starting point. Consider the points above before you make your choice.

Get a short list of three. If you feel you need to, call them up to get a feel for the sort of customer service they offer.

But don’t panic. While it’s worth taking your time, this isn’t a ‘make or break’ decision. You can have more than one broker, and you can change brokers if you decide you don’t like a particular service, or find that you grow out of it.