It’s hard enough to make any savings nowadays without having to deal with financial institutions inventing new tactics to keep the interest rates below inflation. Years of belt-tightening and money-minded living can often prove fruitless when your money is left in the hands of the banking system. With the advent of the Retail Distribution Review, financial advisers have been required to disclose their practices publicly, leading to increased interest in DIY investments.
The dawn of a new era
Those with smaller amounts to invest have found this new form of financial management extremely attractive. Most investors choose to rely on online fund supermarkets to manage their investments, particularly as the financial watchdog implemented new standards of transparency. Prior to this change, platforms had been deducting commissions from the annual management fees charged on investment funds. Whereas they would have handed over up to 0.75 per cent of the value of their investment each year, investors now pay for each deal and have up-front administration charges.
The choice is yours
The market is teeming with stockbrokers and fund platforms, many of whom offer highly competitive rates. Their fees are either fixed amounts charged per deal, or percentages of the investment value. These fees vary significantly across brokers. Depending on the investment, some brokers charge 30 times more than others, though the charges usually decrease as the investments grow. When it comes to investment decisions, though, there are a plethora of factors that have little to do with charges to take into account before selecting your broker. After all, investing is a matter of both quantity and quality, and investors have different requirements with regards to both criteria.
Gateways for stock exchange
Stockbrokers generally facilitate trade for assets featured on the London Stock Exchange and the AIM. AIM stands for Alternative Investment Market and is the LSE’s international market, trading the assets of growing companies.
Whereas companies listed in the UK are generally regulated by the UKLA, AIM-listed companies are regulated by LSE. AIM-listed companies’ affairs are dealt with by a Nomad (Nominated Advisor). Given the volatile nature of AIM assets and their structure, AIM shares are currently banned from ISAs. Various online brokers will facilitate trade on Plus Markets (currently ICAP’s ISDX), which is an exchange dedicated to small companies.
Some new trends have begun to emerge in online stockbroking over the years. Brokers are extending their product range, funds platforms have turned to stockbroking themselves and websites which provided investment information now offer transactional services. Some examples are Interactive Investors, who work with FTSE 100 and AIM markets, or Motley Fool, who offer nominee accounts for traders willing to invest in companies listed on LSE, NYSE, NASDAQ, NYSEMKT, MTA and Euronext.
Most online brokers will offer nominee accounts, only. A nominee account entitles investors to dividends and other earnings as the beneficial owner of the shares. However, the investor is not the legal owner of the shares. The named holder, usually an execution-only online broker, holds the assets on behalf of the investor. Execution-only brokers do not offer any advice on deals, but tends to all transactions being made. Nominee accounts’ main advantages are that they facilitate quicker settlements and they are streamlined for the investor’s peace of mind. The online broker holds the stocks electronically on behalf of the investor, therefore the latter does not receive share certificates or any associated perks. However, online brokers are generally able to deal with settlements, dividend payouts and corporate actions much quicker than an investor.
Some brokers may offer personal Crest membership. Crest is the national electronic settlement system. Because these memberships are costly and hard to maintain, online execution-only platforms which feature this option charge considerable amounts.
Decisions, decisions, decisions
Online stock trading brokers usually require you to open an online account. Depending on the type of investment you’d like to make, your projected earnings and the timescale of your transactions, there are various options available to you. As a retired investor looking to magnify your savings and retirement earnings, you could look into setting up a SIPP (Self-Invested Personal Pension) account. If you’re looking to secure your children’s university fees and expenses by investing their allowances and piggybank money, you may find stocks and shares NISAs to be to your liking. Thirdly, if you’re an active trader, committed to constantly dealing numerous large-scale shares across a wide spectrum of sectors, you may be more interested in a fund and shares account. Brokers may have different names for their services, but the basic advantages are the same.
SIPPs are a form of pension plan dedicated to people who would like to make their own investment decisions, rather than relying on a bank. SIPPs usually come without any set-up fees, and funds are dealt free of charge. Share deals usually incur individual charges, but annual charges are capped, so the more shares you invest in, the better. Tradable assets include funds, investment trusts, shares, ETFs, cash, gilts and corporate bonds.
Stocks and shares NISAs are Capital Gains Tax-friendly accounts that can help you shelter savings of up to £15,000 from tax, and the tax-free amount is sure to increase every few years. While NISAs don’t offer complete tax-free status, this year’s allowance can be shared between savings and investment accounts. The tax-free wrapper applies to income from gilts and corporate bonds, while share income and dividends are taxed 10 per cent prior to receipt. Taxpayers that fall into the higher-rate category stand to gain from this arrangement. You make your own investment decisions and you usually have comprehensive lists of leading fund managers at your disposal. Corporate bonds, gilts, ETFs (Exchange-Traded Funds), investment trusts and shares are all available for you to trade as you please, and you can split your £15,000 CGT allowance between your stocks and shares NISA and your cash NISA, transferring the money back and forth as you see fit.
A Funds and Shares Account will usually be better suited to those who wish to trade internationally, relying mainly on American, European and British stock exchanges. Government bonds, ETFs, corporate bonds and Investment Trusts are also available. Depending on the broker, these accounts have certain perks for active traders and most platforms have developed their own dealing application to boost investment. Funds and shares accounts are also aimed at Initial Public Offerings. They offer investors the opportunity to invest the capital needed for newly-listed companies’ IPOs, and to take full advantage of new issues of shares.
Trade volume and initial investment
The primary factors in selecting an online broker will undoubtedly be the frequency with which you intend to trade, and the estimated investment value. These parameters will affect the broker’s charges per deal and per annum. Hargreaves Lansdown, for instance, charge between £5.95 to £11.95 per share deal, and there are no limits to how much you can invest, so the more the merrier. With TD Direct Investing, trading at least 15 times in a calendar month lowers the deal charge from £12.5 to £8.95. Trades of this nature are known as ‘active trading’ or ‘day trading’. They are more speculative by nature and they can generate tremendous short-term returns, so a committed trader will find volume discounts to be very appealing. Even so, a prudent approach to investing is recommended. Otherwise, you could overtrade your way into a situation where the accumulated shares erode your forecasted returns.
Another form of investing is known as ‘value investing’, and it is typical of stock market connoisseurs. These veterans of stock exchange lie in wait for their coveted shares to be undervalued. They take advantage of the media attention given to certain companies, make assumptions concerning the long-term performance of the company, and buy or sell assets accordingly. They typically look for assets with high dividend yields and deflated price-to-earning or price-to-book ratios. Trade volume is a matter of share price and number of assets acquired alike, and value investors usually value both equally. These investors usually make less frequent decisions. An example are Junior NISA account holders, who are interested in steady, long-term returns for their children and are more risk-averse than day traders.
Some brokers will charge investors for inactivity, or levy hefty administration fees. This practice is common with ISAs and SIPPs. Because these accounts are tax-free, investors usually have reduced trading activity, urging brokers to penalise them. Reinvesting your dividends could also cost you. Drip-feeding money into an account on a monthly basis is best where you own a regular investment account, although these can end up costing you more in the long run than a simple account. On top of these fees, VAT may also be deducted. It is best to read their terms and conditions before registering for an account.
The type of customer support you can expect to receive is a serious matter that should be considered before entrusting an online stock broker with your savings. Most stockbrokers offer the type of service described above and entitled ‘execution-only’. While they offer guidelines and research reports and make them readily available to all customers, they are prohibited from giving individual advice to their customers. Some smaller companies, such as Redmayne Bentley and Killik, may still offer guidance at the time you read this article, but be prepared to reveal your financial circumstances to the last detail if you want them to offer advice that is relevant to you.
There are two types of customer service online stock brokers can offer. ‘Advisory’ support means the broker may recommend or suggest certain assets, but leave the decision up to you. ‘Discretionary’ is the type of service that includes a bespoke portfolio, but this is usually also only launched with your consent. To browse through lists of brokers offering services of this kind, the WMA website can come in handy. WMA was previously known as the Association of Private Client Investment Managers and Stockbrokers. The association offers a wealth of advice and guidance, and it is concerned primarily with upholding stockbroker standards. It also offers tips on detecting ‘boiler room’ and other types of scams.
Before making your mind up, read online reviews, evaluate their website, and assess the level of customer service they offer by telephone, chat or e-mail. It is extremely important that they have real-time data available for you to use, and that there is someone ready to serve you at all times. Execution speed is just as important, and so is the broker’s trustworthiness.
Execution-only brokers usually offer a range of portfolio services. Depending on the type of account you’d like to register for, your aversion to risk, your expectations and foreseeable investment size, portfolios can be drawn out for you with a few suggestions. These typically include assets which have been known to yield the payouts you’re looking for in the time you specified, but they are offered automatically and will not take into account sensitive company issues that may have arisen over-night. Speaking to a stock broker who offers advisory or discretionary services over the telephone may be wiser than relying on computer-generated data, where you believe your risks would be too high.
A ready-made portfolio is aimed at long-term investors, typically value investors. They will usually include companies from different main sectors, whose funds are managed by reputable managers. Both defensive and aggressive portfolios are subject to market fluctuations, and should not be taken as is, but adjusted according to budget and personal requirements.
There are brokers who offer multi-manager portfolios. These are ready-made portfolios with a wide range of assets bundled into one, easily manageable investment. A professional manager is assigned to the account and makes buying and selling decisions on your behalf, for a set fee.
If you’re serious about trading, the website’s availability is absolutely essential to you. Before registering for an account, check to see how fresh the information is, if the website is completely functional and if peak trading hours don’t affect the responsiveness of the website features.
Live share prices are extremely important for the active trader. A stock broker who offers interactive charts and graphs, share price alerts, watch-lists, and unbiased statistical forecasts will be worth your annual charges.
Tips and sleuthing
You should aim to find a stock broker who is willing to offer sector reports and research findings for free. Share tips and investment guidebooks are also very useful, but try to filter out the unbiased information from the ‘noise’.
Some brokers create their own lists of top assets for their perspective customers. Rigorous analysis of statistical data goes into the making of these lists, and brokers take great pride in the result. They often conduct regular interviews with reputable fund managers to be able to reach their conclusions and bring the product of their research to our attention.
There are brokers who offer certified shares on top of the ‘nominee’ shares discussed previously. These shares entitle you not only to a crisp certificate that acknowledges your stake in a company, but to a range of perks and freebies, as well. Some companies welcome you to their board meetings if you own a certain number and type of shares, while others would rather offer insurance, cruise and flight discounts, food and shopping vouchers, free exhibits and company tours. These freebies shouldn’t be a primary reason for investing in a company, but they could help you manage utility and holiday expenses better.
Your decision to invest should also take dividend yield into account. Regardless of the value and number of your shares, you can stand to gain considerably from focusing strictly on high-yield investments. They may carry more risk, but they could also help you reinvest and expand your portfolio.
Mobile App availability
Check for ways of accessing your account remotely. Mobile apps can come in very handy, especially if you’re always on the go. A stock broker’s app should be available for download free of charge from the firm’s website, Google Play, App Store or Windows Phone Store. It should be compatible with iOS, Windows and Android-operated devices. It should give you free access to real-time indices and prices, as well as up-to-date market news and research. Account holders should be able to login securely and manage their funds remotely using this app.
Before reaching a conclusion, browse through articles mentioning awards and prizes. Larger stock brokerage companies will make ample use of the titles and awards they’ve amassed over the years, and the awarding association’s logo will be featured on their websites. Check to see if the awarding body exists and if it has, in fact, issues a prize for the stock broker in question.
Execution-only stock brokers are known for maintaining low prices due to the fact that they do not become involved in making trading decisions. Nominee accounts, in particular, are inexpensive alternatives to holding accounts with countless certified shares. One reason for the low price is the fact that all documents are kept online. Another is the fact that online stock brokers have the infrastructure necessary to handle large amounts of transactions and settlements effortlessly.
Fees for active trading range from £5.95 to £15 per share deal, and annual charges can go from £9 to £7,150, depending on investment volume. Conversely, fees charged as percentage of investment range from 0.01 to 4 per cent, at the lower end of the scale.
Trading share certificates takes the charge per share deal as high as £30-£40. Trading directly with registrars, such as Capita and Equiniti, is another option, but will not lower your costs.
Crest membership, the third option, attracts a yearly fee of nearly £25.
As with any type of investment, there are some risks. Online investments, especially, create a sort of ‘winner-takes-all’ environment, because when they make their decisions, investors can’t rely on practical information or on word-of-mouth as much as they would if they were able to speak to a broker. Fund platform users’ investments are covered up to £50,000 by the Financial Services Compensation Scheme, but investments exceeding this benchmark are vulnerable. FSCS is the national compensation fund for customers of its authorised financial service providers. To be able to take advantage of this scheme, be sure to check that the stockbroker you’d like to trade with is listed in the Financial Services Register set up by the Bank of England’s Prudential Regulation Authority (PRA) and provided by the Financial Conduct Authority. The FCA regulates stock exchange markets, and the UKLA is a regulator for companies listed on these markets. The FSCS gives investors the opportunity to search their database for companies in default. Whenever there is an issue with an online stockbroker, the investor may file a claim against the broker to the FSCS, if the broker has been declared in default.
Using a fund platform allows you to hold your funds in one place, regardless of the type of asset you invested in, or the fund manager you have. Keep in mind that any investment comes with a certain degree of risk, and you should be fully aware of the extent of that risk before you apply for an account and start to invest regularly. If you feel you have been treated unjustly, you can contact the FSCS, file a claim and hope for a resolution, but processes of this nature are lengthy. Consider the effects of your dealings before risking your savings.