Stockbrokers for Private Client Investors
Investors are becoming more sophisticated and wish to implement a more hands-on involvement with their own long term sustainable wealth creation. Opening a stockbroker trading account offers investors one such option to do just that.
Selecting a stockbroker sounds like an easy enough process, however after thorough research on the topic, we have realised that there is very little standardised and comparable information available regarding stockbrokers in the South African economy, making it very difficult for investors to effectively compare the various costs and services of the universe of stockbrokers.
As a result, we have created our first annual “GraySwan: Stockbrokers for Private Client Investors Report.” The GraySwan Research Team conducted a detailed analysis into the service offering and fees of a comprehensive list of stockbrokers. This report clearly identifies the strengths and weaknesses of each stockbroker on a like for like basis. As this is not a one-size-fits-all exercise, we have also compiled a short list of questions that will assist us our clients to select the most optimal stockbroker for their needs.
In this article we highlight some of the key considerations which have been documented in our detailed research report.
Discretionary vs Non-discretionary
You as the investor can decide how involved you want your stockbroker to be in selecting securities that you invest in. You can either decide that the stockbroker should select and trade securities on your behalf or you can decide that you would rather conduct such trading yourself. In order to facilitate both of those preferences, stockbrokers have divided their service offering into two main categories namely discretionary trading accounts and non-discretionary trading accounts.
A discretionary trading account is where you give your stockbroker total control of your account to trade securities on your behalf, at their discretion, within prescribed limits. These prescribed limits may for example include limiting the number of of trades a month, only allowing Top 40 stocks or any other specific requirements you wish to be incorporated into the mandate given to the stockbroker. This can be compared to investing in a unit trust where the investment manager manages the portfolio on your behalf within prescribed limits set out in the unit trust mandate.
A non-discretionary trading account is where you are responsible for making the trading decisions and the stockbroker may not trade any securities without your explicit permission. Thus the stockbroker has no discretion as to which securities to trade. Many stockbrokers still allow you to contact your broker and discuss your intended trade and ask his opinion, however the final decision and ultimate responsibility is squarely on your shoulders.
In the rest of this article we focus on non-discretionary trading accounts where you decide what to trade.
The very first consideration when selecting a stockbroker is their trading services. These include all activities needed for physically trading securities. Every investor has different needs and should ultimately select the stockbrokers that fulfil those specific needs.
It will be important to decide the range of securities that you would like to trade such as equities, bonds and derivatives. Most stockbrokers offer access to the listed JSE equity market which includes shares, warrants and exchange traded funds (ETFs such as Satrix). However, not all stockbrokers offer access to other securities such as bonds and derivatives.
Access to International Markets
The investor should decide whether to limit his trading activities to the local market or whether he desires to have access to international markets as well. With the gradual easing of exchange controls and the additional returns generated from a depreciating Rand, more and more investors are investing internationally. Investors can access an offshore based stockbroker but increasingly local stockbrokers are offering access to international markets which add a convenience factor.
Although most stockbrokers offer Online Platforms to investors, these platforms vary greatly in functionality. However, the focus here should not be the Online Platform functionality, but how the investor wishes to access the stockbroker. Certain stockbrokers prefer a personalised service and direct telephonic contact with the client to discuss trades. These stockbrokers will offer limited Online Platforms. Other stockbrokers prefer not to have direct telephonic contact with the clients and prefer all orders and communication to be done via the Online Platform. These stockbrokers will offer comprehensive Online Platforms with extended functionality.
Most stockbrokers offer prices that are 15 minutes delayed. Investors requiring live prices will be charged an additional fee. This is due to the JSE charging stockbrokers more for live prices than delayed prices. Prices that are 15 minutes delayed are generally sufficient for long term traders. However, investors planning to trade intraday might require live prices.
Stop/loss facilities allow investors to set a minimum share price or maximum percentage negative move in share price that will trigger a sale in order to limited losses made on a trade. This risk management functionality is especially helpful for investors to limit their downside risk as most investors are not able to monitor their trades online all the time.
Email and SMS alerts
Email and SMS alerts can notify an investor when an order has been loaded on their account, similar to internet banking notifications. Another alert can then notify the investor when the trade has been executed and at what price. Some Online Platforms also allow investors to set alerts for other events such as large price movements in a security, notification of corporate actions (such as share buy backs) and receipt of dividends. Alerts assist investors to monitor trading activities without having to be online all the time.
The Online Platform should give investors access to some basic account and portfolio information. Some account information that investors should look for are:
- Account/Portfolio Summary
- Performance Summary
- Order History/Trading History
- Downloadable Statements
- Cash Transfer History
- Contract Notes
- Monthly Account Statements
Additional Value Add Services
In the previous section we highlighted the services that investors should require in order to execute trades. There are additional services that investors might require that will assist them in analysing and making their initial investment decision that they will then execute by a buy or sell order/trade. These additional services are discussed below.
One approach to investment decision making is through fundamental research and analysis. Fundamental analysts believe that the value of a security (and its future share price) can be evaluated by examining macro-economic and company-specific financial factors. If you are an investor who makes investment decisions based on fundamental analysis, the availability to research material should be an important consideration when selecting your stockbroker. There are many types of research which vary in level of detail.
All stockbrokers provide access to Stock Exchange News Service (SENS). The JSE requires listed companies to disseminate any corporate news and price-sensitive information on SENS before making it public through other media. Therefore SENS includes public announcements such as financial results, trading in company securities by directors, cautionary announcements, merger and acquisition announcements etc. SENS is available immediately to all participants in the market.
Most stockbrokers will send out daily and monthly market summaries/newsletters showing basic market indicators such as market index performance, top 5 shares, bottom 5 shares, exchange rates and commodity prices as an example and may event add a short economic update.
In addition, most stockbrokers make basic 3rd party research available to investors that may include basic news and media articles on specific industries and securities. These would typically not include personal views and recommendations but only give through information.
Some of the stockbrokers have dedicated analysts that conduct detailed internal research. These research reports include trading ideas, in-depth analysis and recommendations.
Another approach to investment decision making is through technical analysis. Technical analysis ignores economic fundamentals and instead believes that historical patterns in share prices tend to repeat. Technical analysts try to identify these patterns using different indicators.
Most of the stockbrokers offer technical charting tools, however the tools vary in sophistication. It will be important to consider how much functionality you will require in order to assist you with your analysis process.
No investor starts off being an expert and even expert investors feel you can always learn something new and improve your skills. Therefore, if you are serious about improving your skills, you should evaluate the training services offered by your stockbroker.
Stockbrokers that do offer training services tend to offer this for free and they make use of online functionality such as reading material on their websites or webinars. They may also host in person events where they invite you to join them at a seminar with expert speakers from the industry.
We mention fees as the last key consideration as it should by now be clear that fees will depend on the many services listed above. Many investors will only focus on commission/brokerage which is the fee charged for the actual trading of securities. However, there are other fees that all add up to make to total fee payable much higher than expected.
- Account Opening Fee
- Account Administration Fee
- Account Closing Fee
- Transfer Fee
- Withdrawal Fee
- Live Prices
We have found that investors should especially be mindful of account opening and closing fees as this significantly affect the attractiveness of stockbrokers on a total fee basis.
Which Stockbroker is the Most Suitable?
When selecting and appointing a stockbroker, investors need to consider a variety of services and related fees. The GraySwan Research Team has conducted a detailed analysis into the service offering of various stockbrokers and their fee comparison. The “GraySwan: Stockbrokers for Private Client Investors Report” clearly identifies the strengths of each stockbroker on a like for like basis.
As this is not a one-size-fits-all exercise, we have compiled a list of questions that will assist us in recommending the best stockbroker for your needs.
- Do you only require online access or would you prefer regular telephone access (i.e. a personal relationship and contact with your stockbroker)?
- Do you require in-depth market and share research or only wish to execute trades as cost effectively as possible?
- Do you wish to implement short-term and active trading or are you a long-term investor that wishes to buy and sell shares with a longer holding period (i.e. 3 to 5 year view)?
- How many trades do you envisage making per year?
- What do you envisage your average trade size to be?
- Do you wish to trade international shares as well?
- Do you wish to have access to live prices?