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How to choose a broker

This article appeared in the April 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

There are several alternatives, but a good relationship is the key.

By Morningstar

Choosing a broker is one of the most important investment decisions you will make. Stockbrokers can be one of your best sources of advice and most of the larger ones have access to quality research on dozens, if not hundreds, of listed companies.

The vast majority of stockbroking companies are reliable and ethical, and there will be at least a few that offer exactly the service you want. But you will need to shop around. Here's how.

Full-service, discount or internet?

The first decision to make is whether you want a full-service broker, a discount broker, or an online broker.

Full-service brokers offer the highest level of service and are usually the best choice for less experienced investors. They usually distribute detailed research reports on many of the larger companies as well as regular publications and updates.

Top-quality broker research is generally only available to clients. The full service should include up-to-date research on specific shares and industries, as well as recommendations on portfolio construction, monitoring your portfolio and so on.

A good broker will also contact you if something significant has changed in one of the companies in your portfolio or if a special opportunity, such as an attractive new float, comes up.

Of course, the service you get depends on what you spend and you will pay premium brokerage for the full treatment; putting all that research together has a cost.

As you would expect, discount brokers offer a cheaper service with fewer frills. Some simply execute transactions for a set fee or percentage ("execution only") and do not advise you on shares at all, while others provide a newsletter and a few snippets of advice, but probably nothing in detail.

Internet brokers are the industry's deep discounters because of their relatively low cost structures. If you have access to independent sources of information and all you want to do is put through trades, then using an online service may be cost-effective. But there can also be risks if you do not use this type of service properly.

How many stockbrokers is enough?

Some investors use more than one broker, to receive a range of opinions or research. The biggest firms generally have good market coverage but some offer particular expertise in specific areas, such as resources or small companies.

If you have a passion for one of these areas, you may choose a general broker and a specialist. However, most people get by fine with one broker, and spreading smallish amounts of money around two or three is self-defeating. You will not get great service from any of them.

You will still probably need to speak to more than one broker to find one who is right for you. If you are after research, start with the major firms.

You might start your shortlist by asking friends and relatives who they use and the standard of service they receive, although make sure those people deal with the same types of investments and have a similar approach to you.

Also, it is a good idea to do some online research and read some broker reviews and ratings.

Screening the prospects

Next, talk through your needs with the shortlisted brokers over the telephone. They will probably ask a few questions about the types of investments you want to make and tell you something about their service.

Explain your financial position and the types of investments you wish to make, and don't be afraid to ask if they deal with clients like you.

Generally, broking firms segment their client bases and some prefer not to deal with smaller clients, or may offer them a lesser service. That's fine - plenty of other firms are happy to deal with smaller clients, knowing they will often become bigger clients one day.

If you are comfortable with the answers, make an appointment to see an adviser. If not, move on to the next one.

Interviewing the broker

Advisers are legally required to "know their clients" before they can recommend anything to them. So you can expect a prospective broker to ask about the investments you want to make, your current financial position and your goals.

It is important to be clear in your mind, before the interview, what you want to achieve from investing. The broker will also be forming a picture of what type of client you are, how often you are likely to trade and what amounts of money will be involved. That's fair enough; commissions are a broker's livelihood.

Be as honest as possible with the details. If you are looking to make small transactions, say so. If you are a long-term investor rather than a trader, make that clear. There is no point telling a broker you are one thing when you are another.

Also remember during the interview that the broker will be acting as your agent. You are the client and need to feel satisfied you will be able to build a relationship. This comes down to the personal chemistry between both of you. If it's there, that is a good start. Otherwise, think about going elsewhere.

Getting first-rate service

Having chosen a broker you will want to keep them on their toes and that is as much a function of your effort as theirs. If you have followed the guidelines above, you should have agreed on your expectations upfront.

If your broker has undertaken to contact you regularly with fresh share recommendations and early warnings of trouble and that is not happening, pick up the phone and find out why.

It could be that you are putting through far less money than you said you would, and dealing with you is hardly worth the effort. Or maybe you simply deserve better and need to go elsewhere. The key to a good ongoing relationships is to start off on the right foot.

What happens when you buy and sell

Armed with a trusty broker, you are ready to hit the exchange. But to keep your broker on their toes you will need to understand what they are doing to earn a commission and how your transactions will be handled. Here is what happens when you buy or sell shares:

1. Issue the buy or sell order to your broker

After discussing the transaction with the broker (if you are using a full-service broker) you will have to place an order "at market" or "at limit". As the term suggests, "at market" means at the approximate current market price of the security and your order may well go through almost instantly.

If this price is volatile during the day, a good broker will generally get you the best possible price if you are selling, or get you in at a lower level if you are buying. But don't expect miracles. Markets can behave in strange ways, and windows of opportunity can easily slam shut.

Similarly, if the market price suddenly differs dramatically from the price when you last spoke to your broker, you ought to receive a phone call before the transaction is processed.

An "at limit" order means you specify the lowest price you will accept if selling or the highest price you will pay if buying. Your broker should be able to give you an idea of the volume of trading in the shares that day and the likelihood of your transaction going through at your preferred price.

2. SEATS operator enters your order

Stockbrokers used to place orders by scribbling on pieces of paper and hurling them at each other in a testosterone-charged area known as The Pit in the stock exchange. Computerisation means that things are now a little more civilised, and a lot less colourful.

Once you have placed the order, an operator at your brokerage firm plugs it into a system known as SEATS, the Stock Exchange Automated Trading System. SEATS shows your broker each individual order and trade, exactly how many buyers and sellers there are for the shares, and how well they have performed during the day.

It is a bit like an air traffic control system for shares, which lines up buyers and sellers down the runway in time priority, and automatically matches the first two that agree to take off at the same price. You are in the air and there's no going back now.

3. Broker sends you a contract note

As soon as the order is matched, your broker sends you a "contract note". This will confirm details of the transaction, as well as brokerage fees and government stamp duty. Check the details carefully and keep it for your records.

4. Making the exchange

Within three business days of the transaction going through, you will need to come up with the cash (if buying) or the shares (if selling).

Dog-eared share certificates lost in the bottom of filing cabinets are also a thing of the past and transactions are registered on an electronic settlement and transfer system known as CHESS (Clearing House Electronic Subregister System). It automatically advises each company's registry of ownership changes, and transfers the money between the brokers used by the buyer and seller.

About the author

Visit Morningstar for information on latest market and company trends, and sharemarket education. The Learn section on the Morningstar website has a wealth of free information to help investors.

From ASX

Find a Broker helps you select the products, services and types of investments you are looking to get from a broker. It explains the difference between full-service and non-advisory brokers, outlines important considerations before you start trading, and questions to ask your broker. It can help you choose the right adviser and develop a productive relationship.

You can also use the Find a Broker and Find a Planner feature to search for a capital city or regional advisory firm that meets your investment needs. This service simply acts as a directory; your information is not provided to the firm.


The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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