How To

Easy mistakes to avoid when choosing a share broker

By Market Index
Wed 13 Jul 22, 3:52pm (AEDT)

Key Points

  • There are over seventy share broking firms now operating across Australia
  • It is critical you do your homework before signing up to trade on any single one of them
  • You need to find out why a broker might be making certain stock recommendations

Choosing the wrong broker is a blunder that can go on punishing you with investments inappropriate for your requirements, and needlessly costly fees.

Given that there are over seventy share broking firms now operating across Australia, encompassing everything from full-service and online providers, through to more recent entrants like micro-investing and the Robin Hood fraternity, it is critical you do your homework before signing up to trade on any single one of them.

Not all brokers were born equal

One of the overarching mistakes investors can make is to assume that all brokers are fundamentally the same. But when it comes to share broking there is no level playing field.

As a result, it is incumbent on you to perform sufficient due diligence on:

  • What a broker does?

  • Who they’re aligned with?

  • Why they’re recommending one stock over another?

  • What services they offer?

  • At what price?

  • How these criteria best meet your needs as an investor?

To ensure you don’t choose the wrong broking outfit, here are some guidelines to consider.

Put your own requirements first

Instead of putting themselves first, and second-guessing what they require from a broker, too many investors are swayed by familiarity.

It’s a mistake to assume that because a broker (like Commsec or Nabtrade) is allied to your bank, it must automatically be the right one for you, or that any broker will do.

It’s also dangerous to assume that the broker with the most bells and whistles is the one to go with, even though you’ll never need most of these services.

If you’re dipping your toes into the share market with $500 to invest, you’re probably better off seeking a budget online broker or a micro-investing platform.

Don’t pay for what you don’t need

However, as your need for additional financial services grows, you may find that your existing broker can no longer cater for your requirements.

Someone with a much larger portfolio may benefit more from a full-service outfit.

For example, they may want the ability to trade both local and overseas stocks, charting capabilities, in-house research on stocks, customised watch-lists, the ability to trade derivatives, commodities, fixed-income securities - plus a more personalised advice service.

Bottom line is don’t end up paying more for broker services you don’t need.

Are there ‘real people’ to call for help

While most brokers will offer a free web and/or app-based trading platform as part of their free membership, the functionality and quality of these platforms may vary significantly.

It’s also important to check if you can access a helpline with a ‘real human’ to talk to if something goes wrong.

Likewise, if there’s a membership fee involved, find out what’s being offered over and above what the free platforms offer, and if you can - trial it first.

In whose best interests do brokers’ really operate?

While brokers’ ads can appear highly alluring, you need to weigh up the pros and cons of exactly what it is they’re offering, and what 'investor persona' they’re primarily targeting.

Be particularly weary if the only thing a broker is offering you is exceptionally cheap trades, and nothing else.

A no-frills broker may be appropriate if you’re a DIY investor with investment experience already under your belt, who’s happy to ‘stock-pick’ after doing your own research.

If not, you might be more comfortable seeking guidance and recommendations from a full-service broker that’s prepared to invest in helping you become a better-informed share investor.

Are you and your broker on the same page?

Assuming it’s the latter, you should then check that a broker’s investment philosophy matches your own investment goals, and appetite for risk.

What you also need to find out is why a broker might be making certain stock recommendations.

That’s especially true if the broker’s counterparts (upstairs and behind Chinese walls) are responsible for bringing the same stock to market.

In other words, it’s a mistake to assume that the broker is necessarily doing you a favour by offering you access to an IPO (or certain shares), they often might have vested interests that you’re unaware of.

Then there are Robin Hood platforms, which regardless of offering incredibly cheap trades, may encourage younger and more naïve investors to put all their money on a single stock, in the hope that momentum will A) push the price higher, and B) generate even more trades.

Written By

Market Index

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