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FINANCE

What if you chose the wrong stockbroker?

At the start of a period of investing, be it in our teens, our early twenties or our middle years, we tend to be less educated than we’d like. 

This makes sense; a lot of investing wisdom comes from the experience of investing, so how can we be on top of our game before we even begin?

The problem with our lack of investing knowledge is that we all make a single decision when we begin investing, which our older and wiser self needs to live with. That decision is our choice of stockbroker. 

For whatever reason, many of us can find ourselves feeling regret over our initial choice, and it’s not surprising to see people change accounts completely when they feel they have no other choice but to jump ship. 

What can go wrong?

First of all, our novice selves may not be able to anticipate what our investment portfolio and trading patterns will look like in 5 years. This is a problem, because it means that we do not have enough information when starting out, to understand whether our choice of stockbroker will be suitable and well-matched to our long term investments. 

I don’t blame anyone for not having a crystal ball to this effect. We only know what we plan to invest in in the coming weeks, not what salary we’ll be on or what investment preferences we’ll have in ten years time. 

An example of what can go wrong is an excitable investor choosing a stockbroker account which has very low trading fees for high-volume traders. For example the account may offer trades costing just £3.95 if the investor makes 20 trades per month.

When choosing the account, that might be the investor’s plan. They perhaps envisage becoming a day trader, buying and selling stocks and ‘playing the market’. 

However, just 4 months later and losses from trading might give that investor a dose of reality. Instead, the investor decides to just adopt a ‘buy and hold’ approach. The problem is that the stockbroker does not price trades competitively for only 1 – 5 trades per month, and therefore the investor is left ‘overpaying’ for trades for the rest of their account life.

Another mistake is choosing the account that charges the lowest cost right now, rather than the account which will charge the lowest cost over the next ten years. I’m talking about platform fees. 

Platform fees are usually either a flat fee or charged as a % of assets in the account. A % charge usually favours a small investor, as a flat fee can be quite a noticeable percentage of a starting pot of money. 

However, flat fees might be really appealing when the account grows beyond a certain value. There will be a sweet spot where the account has grown large enough that the flat fee is lower than the % fee would have been. 

Investors rarely look far enough into the future to see that the flat fee would be the better choice. 

What can we do to choose better?

What you can do to make a better stockbroker choice is to visualise your portfolio in five years time. What does it look like? What asset classes have you invested in, and what investments or funds have you used to take your positions?

When you compare stockbrokers online and weigh up the pros and cons of each, only picture this hypothetical investment account, rather than your immediate investment plans, when making the decision.

This will hopefully reduce the chances of a midlife regret over your stockbroker choice. None of us has a crystal ball, and of course we cannot predict where the market will be or what our portfolio will have grown to. But we can factor in the obvious facts such as a) Our portfolio will grow over time and b) we’re likely to trade less after the initial excitement of becoming an investor has worn off. 

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