Getting your savings to grow has never been tougher. Bank deposit rates are on the floor and that means people are having to take on more risk than they might normally be comfortable with in search of return. That could mean trading foreign currencies, investing in bonds or taking a punt on the stock market. Whatever you choose, you will have to go through a broker – in person or online.
In Ireland, there are a very small number of stockbroking firms. Merger, mishap and competition has seen the number of options for domestic investors reduce. And it could get worse. Davy, the largest player in the domestic market, is currently looking to acquire the next biggest broker, Goodbody, which is currently on the market. At the same time, a number of online brokers have entered the fray, offering extremely competitive rates.
But how do you choose between one and the other, how much will they charge and what are the options for holding stocks or bonds?
For brokers, the market is undoubtedly becoming more difficult, as the recent departure of industry stalwart Campbell O'Connor indicates. It blamed its decision to close down on the "ever-increasing complexity of doing business in a changing regulatory landscape, which does not favour smaller firms".
David Quinn, managing director of Investwise, only sees the situation getting worse. "I would say that it's a concern that there is massive consolidation. We may only end up with two or three firms by the end of next year," he said, mentioning that possible merger of Davy and Goodbody.
“Internationally, the competition and downward pressure on fees is ferocious,” he explained, referencing the online operators.
So what are the ever fewer number of stockbrokers offering by way of products? Customers can choose first to have either a discretionary account – where the broker makes investment decisions on their behalf – or an advisory account – where the broker advises them on what stocks to buy or sell, but the customer makes the decision. Then there is the ever more popular option of the execution-only account, where the broker simply buys or sells shares that you have chosen yourself without offering advice.
How much you pay for the service will depend on which approach you choose. And that will largely be determined by how confident you are with stock investments. Those with little understanding of the market or the dynamics of equity investing might well opt for a hands-off approach with a discretionary account. Those with a preference for retaining control over their decisions but uncertain on strategy might prefer an advisory account approach while the more knowledgeable, active and budget-conscious investor – or those who consider themselves more knowledgeable – would tend toward an execution-only account.
Discretionary accounts are, naturally, more expensive. The minimum you'll spend with Davy for a discretionary account, for example, is €3,000 plus VAT. And you'll need to have a substantial balance to begin with. In the case of Cantor Fitzgerald, they'll only accept you for their investment management service with a minimum investment balance of €250,000.
For those who are happy enough to trade on an execution-only basis, or perhaps don’t have the financial means to employ advisers, the market becomes very competitive.
Let's take an Irish stock like Ryanair and assume that you are buying €1,000 of shares in the airline. With the Davy Select Personal Investment Account, you'd pay its minimum commission charge of €14.99. Cantor Fitzgerald, meanwhile, is at the top end of the fee spectrum with a minimum commission charge of €55 plus a contract charge of €40. Goodbody falls somewhere in between with a minimum commission of €25.
But if you choose to look toward the online operators, your commission drops radically. On those same Ryanair shares, commission with Dutch online broker, DeGiro, amounts to just €2.58. British-based rival IG has a minimum commission charge of €10.
And cost counts. Remember, you need to make all that money back first before you make any profit on the investment. Bear in mind that you also pay stamp duty on share purchases of 1 per cent which, in the case of our hypothetical Ryanair investment, will set you back a further €10 no matter what broker you use.
But if, you think you’re starting to get your head around the charging structure in this area, think again. Because the traditional operators do charge more than just commission.
In Goodbody’s case, you’ll pay a €100 account maintenance charge per year, plus VAT. Davy, meanwhile, charges €50 per quarter if you’re just holding shares and not buying any new ones. That fee is reduced, or waived, if you pay more than €50 per month in commission. And, for Cantor Fitzgerald clients, a minimum administration fee of €300 applies.
For the online operators, again the fee structure is different. DeGiro works on a “pay-per-use” policy so you just pay for a service you use. In IG’s case, there is a £24 (€27.55) “custody fee” per quarter charged if you hold shares at the end of each quarter. However, any commissions paid during the quarter will be deducted from the fee. Additionally, if you deal three or more times on your share dealing account or hold investment worth £15,000 or more, you’re exempt from the IG charge.
If you like the personal touch and must use the telephone – and we’d argue that you shouldn’t – you’re going to pay for the privilege with considerably higher charges. With Davy, rather than the €14.99 minimum commission charge online, you’ll have to pay €100 for the benefit of picking up the phone. And over at IG, rather than paying €10, you’ll have to pay €50.
Paper or electronic
Once you've actually bought your shares, you hold an asset and therefore should have some evidence of that asset. In the old days, brokers sent clients out proof of ownership by way of paper share certificates. These were concrete proof of ownership but they had their drawbacks. If you wanted to trade, you might miss the best deals as you first needed to post your certificate into your broker. And, if it got lost, you would be landed with very hefty charges – and bureaucracy – to replace it.
Share certificates do still exist but they are becoming increasingly rare. And these days, there are other, more efficient options – an electronic record of your ownership. There are two options here – a nominee account where your shares in a company are held with those owned by other clients of the broker or what is known as a Crest personal member account.
All brokers will have nominee accounts and all the brokers mentioned in this article offer Crest (for Irish shares at least) with the exception of DeGiro.
It is worth noting that, apart from the risk of losing it or delaying your share trading, if you are someone who has share certificates and wants to offload your assets, brokers will charge more for the trade.
With electronic accounts, your shares are held through your broker and their cost for doing so (which varies between the two formats) are included in their fees.
The key difference between these two mechanisms is that, with a Crest system, you’re the legal owner of the shares whereas, with a nominee account – or what DeGiro calls a “bearer share” – you’re the beneficial owner. For some people, the anonymity of a nominee account is attractive; others like what they see as the additional comfort of a Crest account.
Clearly, if your broker is holding your shares, you need to be sure that, if they go out of business for any reason, your investments will be protected. Irish brokers are regulated by the Central Bank and they segregate their assets. DeGiro, meanwhile, is regulated in the Netherlands and uses EU passporting rules to allow it to operate across the single market. It too uses a separate custodian entity to ensure your assets are kept separate from the company’s balance sheet.
IG, which also uses a separate custodian, is regulated by the UK Financial Conduct Authority. It used to have an office here and when that shut, the company assured customers that their accounts wouldn’t be affected.
One thing that is difficult with Irish stockbrokers is achieving the sort of transparency on fees that customers are often advised to seek. Put simply, none of them charge on the same basis as any other.
It’s almost as though this is done deliberately to make it difficult for customers to determine best value. And as most insist on you having an account with them to trade, it is worth taking the time to work through their varying fee schedules to try to understand who offers best value overall for the particular blend of services you require.
Nevertheless, in David Quinn’s experience, “traditional stockbrokers are almost as popular as ever”. “I think people trust the brand and the security and location of the traditional stockbrokers and feel comfortable that they have bricks and mortar operators,” he said, adding that under-40s are increasingly shopping around.
And can we expect competition to heat up in this market any time soon? According to Quinn, the size of our market isn’t tempting the larger overseas operators. “They’d have to invest quite a bit to get traction, so our stockbrokers are protected because of the size of the market. Most of them look at Ireland being a branch of their UK operation.”
For Quinn, there are pros and cons to the traditional and online operators. And not everything comes down to fees. For the individual investor, it’s important to understand investing and how stock markets work. Otherwise, the fee structure of the operator they’re using will mean very little in the long term.