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Writer's pictureCharles Miller

Rule of thumb for selecting an online broker

Updated: Oct 6, 2021

This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below.


At Narrowboat, we don’t bother doing product reviews. There are far too many better sites at doing that. Nonetheless, I thought it would be worthwhile touching on some local and international brokers and how you should assess which one to use. I am evidently not famous enough to be plugging a product but instead giving you a framework to decide


Using free brokers

Personally, I do not use “free brokers” (e.g. Robinhood) for the following reasons:

  • Their model works because they sell your trading data Payment for Order Flow to other investors (generally high-frequency traders)

  • Your low brokerage could be offset by poor execution (e.g. they are incentivised to let high-frequency traders buying shares before you & making you pay slightly more)

  • They under-invest in their trading platform (e.g. customer service ) to provide this free service

If none of that bothers you – then go-ahead


Fractional shares and auto investment platforms

Previously, the fees charged on these products as % of the amount invested were egregious, however, it is slowly becoming more competitive. My advice with these products is:

  • Fee % really do matter. If you are investing $100 and getting charged $2-$3; you are paying more fees on a % basis than most funds. If you do not have a lot to invest, this may be the only option, however, always think of it on a % basis, not on a $ basis.

  • Cost averaging: Whilst this is a perfect incentive to spend less/invest more. However, do not expect your performance for auto-investment platforms to ever exceed a mediocre performance - because they are buying equal amounts at highs/lows.

  • Beware of brokers keeping your fractional share dividends: It is not uncommon for fractional share brokers to keep dividends to justify cheap brokerage (and avoid the admin of distributing it). If this is the case, you may be better off saving and buying the share directly yourself

As a rule, a full-service broker can be worth the cost if you do not have financial experience or if you value the advice of an expert in your investment process.


If you need any of the following: retirement planning, tax preparation, unique trading requests, IPO allocations, detailed research etc. they can offer real value.


Discount brokers for the ASX

In selecting a discount broker, I would consider the following:

Personally, I will never use an ASX broker which is not CHESS sponsored because we all learnt that lesson in Opes Prime.


Yes, the CHESS sponsorship is an annoying additional cost which the ASX charges you. By no means am I suggesting that brokers like IG Markets, or the much smaller SuperHero, are destined to another Opes Prime-style event. However, for me, this is not a risk I take for domestic equities.


Regarding research/product type, generally, the big companies (e.g. CommSec, the largest player) have the best access to broker research. One option is to have a Commsec account ($20 trades) with access to all the products and research and to do most of your vanilla investing through Selfwealth or Pearler ($10) or this recently launched Stake ($3)


Of course - there are various features each of these brokers have, but at the end of the day, you want to be able to do your research and not pay a lot of $ in brokerage.


Buying shares overseas

Before I delve into this, it is always worth remembering that a lot of famous investors (Peter Lynch and Warren Buffett) have warned against investing in overseas countries. That been said, they both had the benefit of coming from the US with a larger market than Australia.

If you choose to invest overseas, for whatever reason, it gets more complicated. I think the main things to consider are:

  1. FX fees

  2. How many products do you need?

  3. Administrative burden

Both Stake and Selfwealth allow you to invest in US stocks with no administration. Offsetting this, they do charge high FX fees.


One other option is you use a cheap FX provider (e.g. Revolut/Wise) and to set up a brokerage that trades in these countries (e.g. Interactive Brokers). This is way more effort, but it does save you the FX fees.


Either way, I would say that the time difference between Australia and the rest of the world means that it is probably best to choose a broker which does not require you to trade often to access cheap brokerage

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