Online brokers have made investing much easier and faster in recent decades. And investors have an increasing choice following a series of new platform launches in recent years. However, when you invest you place a great deal of trust, and maybe money, with the broker you select to transact for you, so it is important to pick the right one. When doing this you should think carefully about how you plan to use your chosen platform, asset security and possible liquidity problems – before handing over large chunks of your money to any one provider.
There is a wide variety of platforms available, from established brokers who offer all listed securities to commission-free apps with a select few of the most traded stocks. So you could use different platforms for different purposes, if you can bear the additional administrative burden, and are aware of the additional costs that you could incur.
Thanks to robust regulation you should be able to safely hold all of your investable assets with one platform, provided that you pick an established and profitable one. Most of the major platforms have client accounts ranging in size from under £1,000 to several million. But whatever your amount of money, you should understand how your platform holds it and what might happen if something goes wrong.
Risks to your assets
If a broker goes into administration, your assets are ring fenced from the broker. Financial regulations stipulate that platforms must keep client money completely separate from their own capital, and make sure they have sufficient funds for an orderly wind down if they cease trading.
Mike Barrett, consulting director at platform consultancy the Lang Cat, says: “Realistically, for anything to go wrong [with asset ownership on platforms] it will probably need to involve fraud, or certainly some serious mismanagement by the platform provider. And with the regulatory oversight these firms are put under – especially the larger firms – I’d be astonished if this were to happen. If it did, the Financial Services Compensation Scheme (FSCS) would pay out, but this is limited to £85,000 per investor.”
Although your assets should be protected, the administration process of platforms could take months, so it is likely that there would be a period during which you could not access the money you have with the platform that has collapsed. Depending on how you like to invest, this could put you at a serious disadvantage when markets move quickly or if you require immediate access to your assets.
You can check the financial strength of a platform by looking at its accounts. Hargreaves Lansdown, for example, holds well over its estimated regulatory requirement of £180m – £319m as of 30 June 2020. AJ Bell and IG are also profitable and well capitalised, so look like good places to hold large sums of money.
Interactive investor is also financially robust and its profits have been rising. This platform is best known for its flat fee charging structure, which it says makes it profitable irrespective of changes in market conditions or interest rates. Interactive investor's chief executive, Richard Wilson, has said that an initial public offering would be a natural progression for the business, and if this happens it will make the platform’s financial position even more transparent.
Platforms such as Fidelity Personal Investing, iWeb and Barclays Smart Investor have the financial security of being part of wider companies – Fidelity International, Halifax Share Dealing which is owned by Lloyds Banking (LLOY) and Barclays (BARC). However, Bella Caridade-Ferreira, chief executive officer at research house Fundscape, points out that if investors have more than £85,000 invested with different parts of the same group, they will only receive one payment of £85,000. “For example, Halifax and Lloyds are part of the same group so investors would receive just one payment regardless of the amount invested with each company," she says. "RBS, NatWest (NWG) and Coutts are also part of the same group so only one payment would be received regardless of the amount held with these three."
Newer, commission-free platforms that typically charge less than the incumbent platforms are more likely to be higher risk because they are not as financially strong. See the real costs of commission-free trading in the issue of 24 July for more on this. For example, Trading 212 reported an operating loss last year following the introduction of commission-free share trading. The platform is more established in derivatives trading where it makes a margin on deals.
Freetrade, Revolut and Stake are also mobile-led apps that have launched in the past few years. While their prices are significantly lower than those of the incumbent platforms and they offer a slick mobile experience, their route to profitability is not clear. This is not to say don’t invest with them – your assets should be ring fenced – and their innovation and price structure is compelling. Just make sure you that you are aware of their financial position and the associated risk, and perhaps start by only investing a small proportion of your wealth with them. The average portfolio size at Freetrade is £3,000, compared with interactive investor’s average individual savings account (Isa) balance of £70,000 and average self-invested personal pension (Sipp) balance of £207,000.
Although online brokers are required by the regulator to hold capital so that they can cover administration costs if they stop trading, if the administrator can’t recover all the costs of distributing the assets from the broker, client assets can be used to make up the shortfall.
Some investors use different platforms for different purposes, and for peace of mind it could make sense to split assets across different platforms – especially if you have a large amount. However, using one platform should be sufficient for most people – as long as it is strong. Having your assets in one place makes your portfolio easier to monitor and tax forms simpler to complete. And as platforms tend to have flat fees or reduce the amount they charge as assets increase, using multiple platforms can be more expensive.
Investors with large portfolios can run into liquidity problems if they want to sell a large number of shares in small companies or ones that are not traded frequently. This is a particular problem during times of market stress, such as in February and March this year. So it is important to understand exactly how your platform buys and sells shares – especially if you want to trade smaller companies shares.
Hargreaves Lansdown, for example, uses 28 different market makers to place client deals, but for these to be executed there have to be other traders looking to partake in the deal. When one of their customers places the trade, Hargreaves Lansdown offers them the best price currently available from their market makers.
AJ Bell says that in instances where there’s low liquidity in a smaller stock and a customer wants to place a large trade, investors are encouraged to call its dealing service team. This means that the dealers can get in touch with market makers directly and place the trade. The company also asks that all transactions over £250,000 are placed over the phone.
Interactive Investor has a higher dealing fee for transactions over £100,000 – £40 rather than £7.99. A spokesperson at interactive investor says that large transactions in small companies might require some patience, and investors may have to pay a premium, but it is “very much on a case by case basis”.
In times of market stress it can be harder for platforms to execute all orders at the quoted price. Interactive investor reported that in March 2020, when there was an exceptional surge in the number of orders it had to process, 98.2 per cent of trades were executed immediately and the remainder manually. But 99.9 per cent of trades were executed at a price at least equal to the benchmarked price at the time of trade.
Some newer platforms are more restrictive. Freetrade, for example, has a limit of £9,900 per transaction because of the Panel on Takeovers and Mergers levy of £1 on trades over £10,000. However, a spokesperson for the app said they are working to remove this limit. Also, the prices Freetrade quotes are an estimate based on its pricing data. It sets a requirement that an order must be executed at a price better than the touch price on the exchange, otherwise the order is rejected.
eToro, a large trading platform that specialises in derivatives but also facilitates stock trades, tends not to offer less liquid or smaller cap stocks to avoid running into liquidity problems. A spokesperson at the platform says that in times of extreme volatility – such as earlier this year – slippage is very possible, and can hinder as well as benefit client transactions.
“The market moves too quickly sometimes, so we may miss the entry or exit points for our clients," he explains. "But we endeavour to execute our clients’ positions at the next available price."