What should I pay attention to when choosing a broker? Are costs the most important criteria? What about security?
An important part of “do-it-yourself” investing is selecting a good (online) broker. Consider the following criteria when selecting a broker :
- Security
- Cost
- Ease of use & service.
- Tax handling
- Availability of ETFs
Security
Investing is a long-term project, it is important your securities are kept in a safe environment.
In most cases, you are not at risk in case of broker bankruptcy, but better prepared for the worst. Key component for this is asset segregation. Your investments must be separated from the broker’s assets. This is usually done in a separate company, also called a custodian. If the broker goes bankrupt, these assets cannot be claimed by creditors. Most custodians use a “pooling” technique for the custody of the securities: the securities of the clients are pooled in 1 account and your share in this account is held.
If the broker goes bankrupt and cannot (fully) return your securities, the investor is (partly) protected by the european investor compensation scheme (1) in the country where the broker is based. This investor compensation scheme also protects investors up to EUR 20.000 per person per institution in case of fraud, other administrative malpractices or if an investment firm is unable to meet its obligations due to operational errors. In some countries the compensated amount is higher, for example up to 70.000 euros in France.
Unauthorized access to your investor account can be another risk. The least secure solution is simply a username and password. Examples of better and more secure solutions are a digipass or 2-factor authentication, where you receive an additional code via text message or email.
Cost
A broker can charge 3 types of fees: monthly fees, transaction fees and miscellaneous fees.
Some brokers charge monthly recurring costs, such as custody or management fees. Try to avoid these monthly costs as much as possible!
For each purchase or sale of securities, the broker may charge you transaction costs. These costs differ from broker to broker and depend on the purchase or sale amount and the stock exchange where the security is listed. Most European ETFs are traded on Euronext Amsterdam, XETRA, London Stock Exchange and Borsa Italiana.
The most important ‘miscellaneous costs‘ are quotes and outgoing transfers.
Obtaining information on stock quotes, real-time or delayed, is possible at all brokers. At most brokers, 15-minutes delayed quote information is free of charge. You can take a subscription for real-time quotes or quotes from less frequently used stock exchanges. Delayed quote information is not really a problem for the index-investor since they only buy or sell sporadically.
If you wish to change brokers, you have 2 options: 1) sell your securities at broker A and buy them again at broker B or 2) a securities transfer.
Using the first option, you take care of transferring your securities. You sell the securities at your current broker (don’t forget that transaction fees + taxes are also charged here) and buy the same securities at your new broker. The major disadvantage of this method is that you will miss some trading days.
If you choose to transfer your securities, brokers will ensure that your securities are transferred without missing any trading days. Your current broker will charge you for this transfer.
Ease of use & service
An extensive broker platform is important for active traders, but this is not that important for passive investors. On the other hand, a convenient app can be a plus.
Good customer service is also important. Take a look at the FAQ on the broker’s website and ask your questions to their customer service department.
Tax handling
Tax handling is an important criterion when choosing your broker. Does the broker deduct the tax on stock exchange transactions (TOB), dividend tax and capital gains tax?
The main Belgian brokers (Keytrade, Bolero and BinckBank) deduct these taxes on your behalf, thus saving you quite a bit of administration. This is not always the case with foreign brokers.
Availability of ETFs
The final selection criterion is the availability of ETFs. If the broker doesn’t offer the ETF in which you want to invest, then you do have a problem. Contact the broker’s customer service department in case of doubt.
In closing, I recommend you always reviewing the terms, conditions and fees before opening a brokerage account.
This info is for informational, educational and entertainment purposes only, and does not constitute financial, accounting, or legal advice. Please do your own research (disclaimer).
Sources :
(1) European Commission. (2016, 11 juli). Investor compensation schemes. European Commission – European Commission. https://ec.europa.eu/info/business-economy-euro/banking-and-finance/consumer-finance-and-payments/retail-financial-services/investor-compensation-schemes_en