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Online stockbrokers vs traditional stockbrokers: Four questions investors should consider

  • Online stockbrokers are competition to traditional brokerage firms, but lower fees is just one factor to consider
  • Investors need to think about the investing style and service they may get from traditional brokers when making a decision
  • For most investors online stockbrokers maybe enough but cashed up investors may benefit from engaging a stockbroker

When it comes to investing in equity markets there are plenty of choices for how to do it these days. Modern technology has provided fierce competition to traditional brokerage firms with a plethora of online stockbrokers available and major financial institutions also offering platforms.

New and experienced retail investors flocked to equity markets as the Covid-19 pandemic gripped the world in 2020, many taking advantage of the sharp dips and smell of money to be made.

The trend seems to have stuck well into 2022, but deciding between platforms or whether to use online stockbrokers as opposed to a traditional brokerage firm comes down to more than fees.

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

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

Merewether specializes in investing in small and microcap companies listed on the ASX along with pre-IPO opportunities.

1. Do I need a full service broker?

Winchester said this is a question investors are best to ask themselves as they may get a conflicted answer from a broker.

“There has been an explosion in low cost online broking for most people who just need trade execution,” Winchester said.

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

“It is worth people running the numbers on the cost between various options and weighing up whether the value they could receive stacks up.”

2. Does a broker’s personal investing style align with yours?

Winchester said most traditional brokers will pass on research and commentary from their internal desk, but it is important to find out their personal investing style.

“Are they conservative or dividend focused or maybe growth focused and willing to take on more risk and volatility? Are there sectors they generally avoid? Are there sectors they are more attracted to or have seen more success in?

“Finding out the answers to these questions and making sure they match yours is important because a good broker will develop a personal relationship beyond just a robot passing on internal research.”

In recent research it was found that Generation X tends to be more risk takers as investors than their younger counterparts Generation Y and Z.

Winchester got tied in with this is how often a stockbroker may disagree with research from their internal team, believing broker research is generally far too optimistic.

“I would estimate 95% of broker research is either a buy or hold, they very rarely say sell,” he said.

“The best brokers will leverage the research from their team but then have their own view on how clients should trade the stock, if at all.”

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

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

“While most people will value things like research or access to corporate actions from brokers, by far the biggest value they can provide is helping clients keep a calm head through volatile times on the market and sticking to the strategy they developed at the start of the investing journey,” Winchester said.

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

“A good broker will probe and get the rationale about what you are trying to achieve with the trade and if they think you are panicking, will talk you down from the cliff to make sure you aren’t acting on emotions.”

4. What’s in it for the stockbroker?

The big commission question, with Winchester noting the classic saying “show me the incentive and I will show you the outcome”.

“For a broker incentivized by commission they may try to get a client to trade unnecessarily. (There are) some classic examples like having clients pivot between the big banks or miners and increasing activity for tax reasons such as realizing losses to offset gains,” he said.

An online broker may be sufficient

Winchester said for a majority of investors an online stockbroker is sufficient.

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

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

He said on the flip side, there are people who can definitely gain value from a traditional broker, affiliated with a broking house.

Especially “larger account balances that qualify as sophisticated investors under the Corps Act and can get access to corporate actions that the broking house is on the ticket for,” he said.

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

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

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