This article is an introduction to the current marketplace for stock broker accounts and other investment platforms, and features a call to action to inspire brokerages to improve their services and fee structures to better match the new form of passive investor which has emerged in the recent decade.
Here is a list of my demands which would make stock broker accounts and investment platforms more investor friendly, particularly for passive investors.
Make platform fees a combination of % and capped. Platform fees generally appeared in the last decade when the FCA banned advisers and intermediaries from receiving commissions off the back end of directing investors into mutual funds.
The loss of this stream of income meant that stock brokers had to quickly create a new (more transparent) way of charging investors for the costs of their service, which are not insignificant.
Currently, stock brokers either charge this as a % of your account value (e.g. 0.5% of all cash and investments held in the account), or as a fixed charge (e.g. £13 per quarter). These fees are generally easy to calculate with a given investment value, but my problem with this is that our investment values change dramatically over time.
Someone who starts saving at 25 could have saved £600,000 by the time they retire, as an example. It’s likely that the account fee they were paying at the age of 25 is very different by the time their portfolio value is approaching £m. It soon dawns on the investor that agreeing to a % based platform fee was probably not such a great idea.
To help – stock brokers should use a combination of % and capped. This would ensure that small investors just starting out don’t see a large portion of their assets being sold to cover fixed fees, and nor will large investors see thousands of pounds walk out of their account each year simply because they have a large balance. It doesn’t cost a stockbroker 10x more to service a £100,000 account compared to a £10,000 account, therefore it makes little sense for an administration-style fee to scale up in direct proportion.
Do away with sign-up bonuses. Long term investors need a stock broker account with a pricing plan that will also work for the long term. Why do we, then, see brokers frequency entice new customer sign-ups through short term bonuses such as:
‘A free share if you sign-up’
‘£50 to spend on shares if you sign-up’
Such schemes offer a short term gain, but no long term benefit. In fact, worse, they could encourage an investor to overlook a long term issue (such as higher account fees or transaction costs) in favour of selecting the broker because of their incentive.
A short term incentive may make an account an attractive prospect to hold your investments for the next 12 months, but a stockbroker account is for life, not just for Christmas. We already know that short term incentives can distort decision making.
A sign-up bonus only adds confusion onto an already dizzying array of metrics and numbers we could use to compare different stockbrokers. Do we really need that distraction when we’re trying to crunch numbers based on costs over a 5 year period, for example?
Overall, I feel that if stockbrokers adapted their offerings to take account of the above, this would produce a less hostile environment for investors, particularly smaller ones, when choosing their stock broker account. They would feel less like they were about to fall into a trap, and more like they were being empowered to choose the account that is right for them in the long run.