There are so many brokers out there. Different levels of service, different pricing schemes, different domiciles. How do you decide if a broker is “bad” or “good”? How do you go about choosing one suitable for long term, passive investing through buying ETFs?
Different people may choose different brokers due to different preferences. This post outlines some criteria that will make it easier for you to understand which broker is better suited for you.
It is important to minimize fees because they affect your returns.
These are some of the typical fees you can expect:
- transaction fees – fees to buy/sell ETFs.
- custody/maintenance fees – fees to hold your portfolio within a broker.
- dividend fees – fees whenever you receive dividend payments from your holdings.
- stock exchange fees – fees to be paid whenever you transact at a specific stock exchange.
- portfolio transfer fees – fees to be paid whenever you want to transfer your portfolio from/to another broker.
Different brokers may charge different fees, with different names, therefore it is impossible to enumerate all possible fees you may pay. Additionally some brokers may charge lower fees when you buy certain securities.
Keep in mind that the fees may also vary depending on the amount you intend to invest or the size of your portfolio.
You should be devoting the majority of your time understanding the fees you will pay and which percentage of your annual investments/portfolio they will represent
Local brokers are domiciled in your own country. You may also have access to brokers which are domiciled in a country other than your own (e.g. DeGiro, Interactive Brokers).
Whenever the broker is not domiciled in your country you may have to do additional work to fill your taxes. Also, keep in mind that foreign brokers might not withhold taxes you are liable in your fiscal residence while local brokers often will.
If you pick a “foreign” broker you should understand if the savings you will have in fees offset this “additional” taxes work. The type/complexity of this additional work varies by country. Often this additional work involves filling a separate annex on the tax form with info about the traded securities/amounts.
Account type and limits
You should understand the type of account you will get. Some accounts require minimum monthly deposits, some accounts only invest in pre-determined set of ETFs, some accounts allow the broker to lend your shares, some accounts allow investments up to a certain limit, some accounts can be used within a pension scheme.
Does the account type fit your investment style and your risk appetite?
Available ETFs and stock exchanges
Does the broker allow you to buy the ETFs you are interested in?
Some brokers only allow you to buy a limited amount of ETFs from a limited set of stock exchanges. Some brokers have more advantageous prices when you buy the ETFs from specific stock exchanges. The limitations are OK as long as they are within what you are interested in.
Legal structure/ Regulatory environment
You should only sign up with a broker which is accredited by the financial authority of its domicile. Note that even within the EU, financial regulations might vary between countries.
Different brokers will use different tactics to mitigate risk to their clients in the event of a bankruptcy of the broker. You should understand the measures that your broker has put in place. This will typically involve creating a separate legal entity to segregate clients assets from the brokers assets. You should understand how your assets are recorded/stored. This requires reading the terms and conditions of the broker which isn’t fun but it is instructive.
You should also get acquainted wit the investor protection measures in the event of a bankruptcy of the broker. The minimum in the EU is 20,000 EUR. But some countries may provide additional protections. This varies depending on the country domicile of the broker.
Foreign currency support
Do you intend to invest in a currency other than your own? How does the broker handle the different currencies? How does the broker charge for currency conversion? Do you have to pay more to invest in securities denominated in foreign currencies?
Some brokers will always do transactions in your primary currency (e.g. Euro) and convert automatically when foreign currency transactions are involved. Other brokers will require you to hold “accounts” on each currency and only transact in that currency within each account.
Discount online brokers tend to solely focus on providing customers the ability to execute trades. Full service brokers provide investment advice and sometimes manage clients’ assets.
Many investors in passive index funds don’t need investment advice/asset management. You’ll have decide what kind of service you need.
This is a very subjective but important topic. Your perception of trust of a financial services provider will dictate your willingness to use it.
Try to understand if other folks have good experiences with the broker and what are the usual complaints. Understand if those complaints are about things that are important for you. Search for reviews in the Internet and browse the broker’s corporate website.
Holding Client Money
Some brokers aren’t allowed (due to regulations) to hold (non invested) client money and are forced to invest it in money market instruments. This means effectively that the value of your non invested amounts may fluctuate according to the market value.
Make sure the broker’s approach to this fits your risk profile.
Accurate and timely customer support is important in the event you have any issue with the broker. This is one of those things that you can only understand by talking to others that have used the service. Another good proxy for good customer support is the quality of the broker’s site FAQ/help pages.
You might have some criteria that is important to you but I haven’t mentioned here. Things like methods that you can use to deposit/withdraw money from the broker, usability of the platform, language of the platform, mobile app support or specific features that the platform should have.
Brokers available across Europe
If you want to see this framework applied in practice, read my detailed guides on brokers available across Europe: DEGIRO, Interactive Brokers, Trading 212.
Disclaimer: This information is for educational and entertainment purposes only. This does not represent, in any case, specific investment, legal nor tax advice nor recommendations to purchase a particular financial product. Learn more at https://indexfundinvestor.eu/disclaimers/