Smart Investor: Picking the best online broker

Smart Investor, November 2011

Australian investors are spoiled for choice when it comes to online brokers. Data provider Canstar Cannex tracks no less than 35 different accounts from 15 different providers; Infochoice covers 29 from 17. It can be bewildering for the novice.

The key to thinning the field is to know exactly what you want from your broker. There is a wide variety of service available from no-frills low-cost, to platforms that provide a wealth of research and charting tools. Some have different accounts available according to how much you’re likely to trade.

Let’s start by working out how often you’re likely to trade. Log on to Bell Direct’s web site and look at its ‘trading style’ menu for an example of how online brokers offer different platforms, with different costs, according to how much you’re likely to use them.

In Bell Direct’s case, there are three available versions: silver, gold, and WebIRESS. Silver is the low-cost option – in fact, the membership itself is free (you still pay brokerage of course). Your ASX quotes will be 20 minutes delayed – meaning you’re not getting up to the minute information – which, for most investors, won’t really matter: you’re probably not a day trader seeking to get in and out quickly, and hopefully you’re investing for the long term. You still get access to research reports.

If you opt for gold, you’ll pay $10 per month as a membership fee, but there are several benefits: your ASX quotes will be live, along with various other market information; you can use charting tools with that live data; and as with silver, you get access to market reports. And if you’re really a frequent trader – a semi-professional – you can opt for WebIRESS, which Bell describes as Australia’s most powerful web-trading tool. For $79 a month, you will get a host of live and dynamic information available, putting you on a par with the professionals for immediacy of information with very advanced technical analysis tools. It’s all about the type of trader you are.

Many other providers also offer varied accounts according to your trading behaviour:  examples are CommSec, E*Trade, NAB OnLine Trading and Amscot Discount Stockbroking.

[Subhead]How low can you go?

Now you’ve narrowed the field to a single product from each provider, what else separates one from another? An obvious place to start is brokerage cost.

Low costs aren’t everything, but they’re certainly welcome. Trades vary from $9.90 apiece to as much as $33, but be sure to look closely at the small print about how exactly trades vary. Take E*Trade, for example: on their normal service, the headline rate for your first trade of the month is $19.95. But that’s only true in orders up to $5,000. Up to $10,000 it’s $24.95, and up to $28,000 it’s $29.95; beyond that it turns to a percentage (this is common at trading platforms) of 0.11%. For your second and subsequent trades, it’s a flat $19.95 and then 0.11% for orders over $18,000.

Sticking with E*Trade, you’ll also notice that on the more active services, heavy trading will be reflected in other perks. E*Trade’s Active Traders system charges you a $79.90 monthly fee to use its sophisticated platforms. But the more you trade, the more your subscription cost comes down, until it is made free with your 10^th trade of the month.

The current leader in the low-cost stakes is CMC Markets, which dropped its headline brokerage rate to $9.90 per trade in August 2010, easily the lowest in the market; some other brokers (E*Trade among them) subsequently dropped their own headline rates. It clearly worked: CMC’s turnover went up 40% in a year, as the rate attracted the more active traders in the market. Regular traders, says Louis Cooper, head of CMC Markets, “are very price sensitive, and the more they trade, brokerage becomes a far bigger aspect of their trading, in terms of what it takes away from their profits.”

Cooper and CMC are at pains to point out that they’re not just about cost; CMC still gives traders a lot of other options, among them free unlimited conditional orders, charting, and fast order processing, as well as education packages. But it’s a key marketing point. Generally, the more frequently you trade, the more brokerage is obviously going to mount up; but then again, if you trade more frequently, you may need comprehensive research and access to real-time data that tends to come at the more expensive places. It’s a trade-off everyone will need to make their own decision on.

In addition to brokerage costs, the more sophisticated platforms that use the WebIRESS platform, like the Bell Direct product we discussed earlier, carry a monthly fee (again, this may be diluted according to how often you trade). Costs for these platforms are typically around $80 per month; for example CommSec’s IRESS platform costs $82.50, St George’s directshares Power $79.90, Amscot’s traderRate product $77, and NAB OnLine Trading’s Professional version costs $77. More costly services are at Trader Dealer ($90 for its Market Analyser and Market Analyser Pro Trader services), $93.50 at First Prudential Markets for its webIRESS service, and $110 for Morrison Securities’ own webIRESS product.

[Subhead]What do you want to trade?

Beyond cost, the next thing to look at might be the sort of securities that are available to trade. Naturally, every broker in the market allows you to trade ASX-listed shares. Beyond that, most allow you to trade ASX exchange-traded options and warrants. Very few allow you to trade the futures and options from the Sydney Futures Exchange (Morrison is an example). Some allow you to invest in other derivatives, managed funds, or directly in stock market floats. The data tables available online for free at Infochoice are a useful place to start researching this.

Another big differentiator is the ability to trade in foreign markets through your broker. Westpac Online Investing, E*Trade, CommSec, Interactive Brokers and St George’s directshares, for example, allows investment in stocks in Asia, Europe and the UK. Brokerage will usually cost a lot more to do this, so be sure to check that too.

Another thing to consider is the way you make your order, and the processes available around it. Some people just want to put an order out there and pay whatever a stock costs on the market at the time; others want to be more specific. ‘At limit’ orders set a price at which you are prepared to buy a stock, and don’t trade until it’s hit. Stop losses are another useful tool: when you buy a stock, you set a limit, and if the stock falls below that limit the broker will automatically close the trade for you, so you know exactly how much you stand to lose. Most brokers allow both of these approaches now, but do check associated costs.

Next: research. How do you trade? Do you want broker research before you make a decision? Do you want to build your own charts? Or do you come to your online broker after already having educated yourself through the newspapers and public sources? This will also impact which broker you opt for. Again, brokers typically offer different research options according to what package you buy. Westpac, for example, has a standard research package, and an advanced one which is free of charge to anyone who trades twice or more per month. It covers news feeds, from Reuters and Dow Jones to specialists like Morningstar and Lexus Nexus. Westpac’s own research, and that of affiliate fund manager Advance, are available, and there are regular videos giving opinion on financial markets.

If you are a charting fan, you probably have your own personal views about the tools and systems you like; most brokers, before you subscribe, will have a demo that shows some of the available charting methods, but you may want to ask directly whether your particular enthusiasms are catered for. Again, Infochoice has a page of its online broker category dedicated to charting; typical packages allow candlestick charting off historical data, and in more expensive platforms, charting with live data.

Finally, check that your broker has a training module available to show you how to use the platform. It’s not much use having bells and whistles available if nobody’s showing you how they work.

In future, probably more and more people will make brokerage decisions based on whether they can access the platform through their phones or handhelds. James Staltari at Westpac says that the mobile phone application it offers with its brokerage package is experiencing “month on month double digit growth”. It allows you to buy and sell, access research, and mange your portfolio. Some day all brokers will do this – all the greater reason not to leave your phone in a taxi.

BREAKOUT: Jargon Buster

Stop loss: When you place a trade, you also place a limit. If the share drops below that level, your broker sells out automatically. That way, you know what the maximum you can lose is.

At market/market order: This means you put an order in to buy a share at the best available price on the market at that time. This is different to a limit order, which says only to buy at a certain price or better.

Warrants: Most warrants give you the right to buy or sell something (usually a share, sometimes an ETF) at a particular price. ASX warrants trade on the stock market. If you buy a BHP warrant, for example, you get exposure to the stock and dividends, but don’t have to pay out as much as you would buying the shares.

ETF: Exchange-traded fund. Behaves like any other share, but it represents something much bigger – like a whole market index, or a commodity. A way of diversifying cheaply and easily.

Dynamic online trading: Some brokers have a platform service which is faster than the norm, with real-time streamed data, and other services like enhanced charting tools. For active traders.

BREAKOUT: Next steps

• Decide what you need from an online broker. Is it chiefly a low cost? Are you going to use charting tools? How much research do you need access to?
• Based on that, see which of the many available platforms has the best match to your needs.
• Setting up an account is then usually straightforward: fill in a form, provide some ID, and you’re ready to go.
• Do NOTHING in terms of real trading until you’ve done all the available training that comes with your membership.
• Consider linking your brokerage account to a cash account – for some people, this is what determines their choice of broker in the first place.