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Two Stockbroking charges Investors need to be aware of
In this featured article newsletter, I'll deal with two issues in relation to stockbroking charges that many investors are not aware of, and which ultimately mean you are bearing higher costs than you may be aware of or, indeed, that you need to.
The first is the introduction by some brokers in Dublin of an annual management fee on 'Advisory Accounts'. The second is the lack of disclosure surrounding foreign exchange transaction charges, which can be considerable. Let me deal with these issues in turn.
Levying Annual Management Fees on Advisory Accounts
To understand why this move makes little sense from a customer viewpoint, I must first outline the three main accounts that stockbrokers have traditionally offered;
- A Discretionary Account: Here the stockbroker will manage monies on your behalf and make the buy and sell decisions for you. The broker is accountable to you for the returns achieved. For the added responsibility, the broker will normally charge an annual management fee of between 0.5-1.0%. They will also charge for each transaction completed, and this charge should normally be lower and probably at a rate of 0.25-0.5% per transaction to reflect the fact that the client is already paying an annual managment fee.
Avoid this service like the plague: It is my view that private investors should avoid using the discretionary fund management services of stockbrokers entirely. They are compromised as they are sellers, not advisors. As the broker also charges for each transaction, they are incentivised to transact. In other words, the broker's goals are not aligned with your's. In addition, it is my experience that few stockbrokers implement sensible investment strategies consistently for clients. If you want someone to manage your money, use an independent fund manager. There are a few in Dublin and a vast range in London.
- An Advisory Account: Traditionally, this service is where the stockbroker offers you the firm's best advice and charges you a higher fee on each transaction. The broker has no responsibility for subsequent performance, although he/she should be setting out with a 'duty of care' attitude. Transaction fees can be in the order of 0.5-1.5% per deal depending on the size of your account and the broker.
However, in Dublin, I have noticed an increasing trend where the brokers are charging an annual fee on 'Advisory' accounts. This, to me, is nonsense. They'll argue that they are just charging what 'the market will bear'. That's fine, and someone like me is free to point out the insanity of it.
- An Execution-only Account: Here the stockbroker offers no advice at all but just executes transactions on your behalf. Traditional stockers, like the Dublin-based ones, have tried to hold on to their traditional 0.5-1.5% transaction fees on this type of account. However, technology and the internet have allowed online execution-only brokers to substantially lower the costs of dealing. If you deal online, you can get fixed dealing charges of circa €15-25 or lower. On a €10,000 deal a traditional broker might charge you somewhere between €50-150. The gap in costs becomes huge with higher sized deals.
For pension accounts, there are added complications. The pension product (wrapper) has an additional cost - often in the order of 0.5% annually. That's a rough guide and you need to ask for details of such costs for yourself and shop around. What you should do is ask your pension provider (be that an independent pensioner trustee company - like Harvest Financial Services or a stockbroker) to separate the cost of the pension wrapper from the cost of the stockbroking account. With an independent house like Harvest you can get a pension product and do your investing through an online account.
My understanding is that both Irish Life (through TD Waterhouse) and Standard Life (through Brewin Dolphin) offer ARF/AMRF holders the facility to deal online.
What to Do?
If you do have an advisory account with a Irish-based broker and they either have an annual management fee on your account or are about to introduce one then your choice is to simply move your account.
How to Move Accounts?
You do not have to sell your current holdings in order to move your account. First, you need to open an account with a new broker. Then you write a formal letter addressed to 'Client Services' in your existing broker requesting that they transfer your stock/fund holdings and any cash balances to XYZ broker, and provide them with the name, address and contact details of a person in 'Client Services' in the new firm. Transfers might take a few weeks. So, it just takes two letters - one to your existing brokers and one to your new broker.
Hidden FX Charges
This is a (mostly) hidden charge and occurs if you are converting from one currency to another to settle a trade. If, for example, you have Euros in your account and buy a sterling or dollar stock, then you have to sell Euros and buy sterling or dollars. The stock broker does this from its back office once you instruct them to do so. But the spread on the currency can be wide. In addition, as a colleague of mine reminded me last week the spread is a cost to you but it is not disclosed on the contract note.
Take TD Waterhouse, the UK online stockbroker, that also offers its services to Irish investors. I noticed a week or so back that when I went to convert some sterling to dollars the spread on the currency was 2%. The market price of the £/$ exchange rate at the time was 1.513, but I was offered 1.483 (2% lower). This was a considerable hidden cost. If you do a £10,000 deal, the transaction cost may be low at £15, but what you are not being told about is the effective £200 that they charge you for converting the currency. In my view, this is particularly poor practice, but I was astounded by the size of the spread at TD Waterhouse. When I called them to query it, they said they have a scaled fx spread so that the larger the deal the narrower the spread. Not good enough in my view and I am closing the account soon.
As long-standing subscribers know, we have generally had a banner advert from FXCM Securities in London (previously ODL Securities) on our website (for which we receive a very modest fee) and do steer subscribers their way. FXCM has stated (in the past) that any accounts opened via GillenMarkets can avail of an fx charge of 0.5%. I think this is automatic if you use the link on the website to open your account.
I do not know what the Dublin-based stockbrokers charge on the fx side, but we might do a survey soon here at GillenMarkets. To find out what you are being charged on the fx side, you can do the following;
- Just before you call your broker or instruct them online to convert some currency to settle a trade look up Yahoo or Bloomberg and find the exchange rate.
- The fx rate the broker gives you should be somewhere on the contract note you receive or else it should be noted in your 'transaction report'.
- Compare the two rates.
- The difference is money into the stockbrokers pocket and out of yours. It is a real cost and it is not being disclosed as such. Again, where is the Regulator!
GillenMarkets & An Online Account
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