Online Brokers vs. Traditional Stock Brokers: Four Questions Investors Should Ask

  • Online brokers compete with traditional brokerage firms, but lower fees are just one factor
  • Investors should consider the style of investing and the service they can get from traditional brokers when making a decision
  • For most investors, online stockbrokers may suffice, but cash-based investors can benefit from engaging a stockbroker

When it comes to investing in stock markets, there are many ways to do it these days. Modern technology has provided fierce competition to traditional brokerage firms with a plethora of online brokers available and major financial institutions also offering platforms.

New and experienced retail investors flocked to the stock markets as the Covid-19 pandemic gripped the world in 2020, with many taking advantage of steep declines and the whiff of money to be made.

The trend appears to have continued through 2022, but deciding between platforms or whether to use online brokers rather than a traditional brokerage firm is about more than fees.

There are other considerations such as whether you will be trading regularly, whether you are a set and forgotten, experienced or novice investor who could benefit from more guidance.

Merewether Capital Seed Fund portfolio manager Luke Winchester said Stockhead there are four questions investors should ask themselves when deciding between a traditional or online stockbroker.

Merewether specializes in investing in ASX-listed small and micro caps as well as pre-IPO opportunities.

1. Do I need a full service broker?

Winchester said this is a question investors should ask themselves as they may get a conflicting answer from a broker.

“There’s been an explosion of low-cost online brokerage for most people who just need trade execution,” Winchester said.

“Traditional brokers still offer value, they can provide advice, research and even access to corporate actions such as IPOs and capital raises if the brokerage is on the ticket.

“It’s worth people calculating the costs between the different options and assessing whether the value they might receive stacks up.”

2. Does a broker’s personal investment style match yours?

Winchester said most traditional brokers would pass on research and feedback from their internal office, but it’s important to know their personal investing style.

“Are they conservative or dividend oriented or maybe growth oriented and ready to take on more risk and volatility? Are there any sectors they typically avoid? Are there sectors to which they are more attracted or in which they have had more success?

“It’s important to find the answers to these questions and make sure they match yours, because a good broker will develop a personal relationship beyond just a robot passing on internal research.”

In recent research, it has been found that Gen Xers tend to be more risk takers as investors than their younger counterparts in Generations Y and Z.

Winchester said the frequency with which a stockbroker may disagree with the research of its internal team is related to this, believing that research on brokers is generally far too optimistic.

“I would estimate that 95% of broker searches are either buy or hold, they very rarely say sell,” he said.

“The best brokers will take advantage of their team’s research, but then have their own perspective on how clients should trade stocks, if at all.”

3. How have you handled volatile periods in the past?

Have you ever experienced market volatility, like the early days of the Covid-19 pandemic in 2020 or the mercurial markets of 2022?

“While most people will appreciate things like research or access to securities trading from brokers, by far the greatest value they can provide is helping clients keep a cool head during times of market volatility and stick to the strategy they developed at the start of the investment journey,” Winchester said.

He said it was easy to just hit the sell button on an online platform during a downturn, but it might not always be the right thing to do.

“A good broker will probe and get justification for what you are trying to accomplish with the trade and if they think you are panicking they will tell you off the cliff to make sure you are not acting on emotions.”

4. What about the stockbroker?

The commission’s big question, with Winchester noting the classic saying “show me the incentive and I’ll show you the result”.

“For a commission-driven broker, he may be trying to get a client to trade unnecessarily. (There are) classic examples like rotating customers between big banks or miners and increasing activity for tax reasons such as realizing losses to offset gains,” he said. he declares.

An online broker may suffice

Winchester said that for the majority of investors, an online stockbroker is enough.

“These are people with low account balances, say less than $20,000, where transaction costs as a percentage of portfolio value should be considered,” he said.

“An online broker can also be good for low risk tolerance or turnover where a set-and-forget portfolio doesn’t necessarily need advice.”

He said that on the other hand, there are people who can definitely gain value from a traditional brokerage, affiliated with a brokerage.

In particular “larger account balances who qualify as sophisticated investors under the Body Act and may have access to corporate actions for which the brokerage is on the ticket,” he said. .

“More active accounts can benefit from access to research and perhaps more importantly a calm head to advise on trades during times of market stress.”

Any views, information or opinions expressed in the interviews for this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse, or take responsibility for the financial product advice contained in this article.

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