Comparing international stockbrokers can be difficult because their charges aren’t consistent. Some will charge flat fees, some a percentage of the trade value, some will impose administration fees, while others will charge an extra fee if you don’t trade frequently, and many other variations.
What’s more, the question of which broker is best depends on how these costs interact with how you trade. There’s no one answer to “which is the cheapest broker?” – and in any case, cost is just one consideration along with quality of service and range of markets.
But it’s helpful to have a grasp of the different way that brokers charge and how a low headline rate can be offset through charges in the small print. So this article discusses some of the most common fees that are listed in the international stockbroker comparison table.
Keeping an eye on costs
For trading commissions, brokers typically either charge a flat fee (eg £15 per trade) or a percentage of the trade value, with a minimum commission (eg 0.5% with a minimum of £25). Occasionally, a firm will also have a maximum commission per trade. A few – more commonly in the US – charge a per share fee (eg $0.01 per share).
Some firms charge the same fee for any transaction, while others charge different rates for different markets. Fees and commissions may vary according to how often you trade (eg £15 per trade for less than ten trades per month, £10 per trade for more than ten). Commission rates may be tiered, meaning that they will be affected by how large your trade is (eg 0.5% for the first £15,000, 0.3% for any amount over that).
In the comparison tables, I have usually included tiered commission as “up to …”, because the tiers are typically large enough that the average commission on the average trade for most of us will be close to the higher amount.
Broker-assisted trades – those done over telephone or email – are mostly charged on a percentage commission basis and are usually much more expensive than online trades.
Many traditional UK stockbrokers – as opposed to the newer breed of cheap execution only brokers – often price foreign trades on the same commission as British shares, but add a foreign dealing supplement as a one-off charge to reflect added settlement, clearing and other costs associated with some foreign markets.
This is especially the case with foreign shares that cannot be registered in CREST, the UK electronic stock depositary; CREST-eligible foreign shares often carry no extra costs. The amount may vary according to the market you’re trading in, but is usually a flat fee rather than a commission (eg £25 per trade for European shares, £40 per trade for Asian shares).
As well as the trading costs, many firms charge an administrative fee, either quarterly or annually. This will often be termed an inactivity fee and only applied to accounts with no or few trades in a given period. Typically this is a flat fee (eg £25), although some firms charge a percentage (eg 0.5% of the account assets). Some markets with
There will often be an administrative fee for any special tax-advantaged accounts, such as an Individual Savings Account or a Self-Invested Personal Pension in the UK. ISAs sometimes have flat fees, while SIPPs are almost invariably charged on a percentage basis.
Some firms may charge a recurring custody fee based on the number of holdings in your account (eg £2 per holding per quarter) or occasionally on a percentage of the account value. This is sometimes waived if you have an account over a certain size or make more than a set number of trades.
In Asia, it’s also very common to charge a corporate action fee for events such as rights issues (eg S$10 processing fee) and fairly common to charge for other services such as receiving and processing dividends (eg 1% of net dividend value). This is less common in European and North American markets, but not unknown.
Certain specific administrative events will usually carry quite a steep fee, but they are typically uncommon and you may never make use of them. For example, brokers will often allow you to transfer in stocks from another brokerage free of charge – after all, they want you to hold all your investments with them. But a transfer out will usually cost you a fixed fee per holding.
Similarly, transferring paper certificate shares into electronic form is usually free. But rematerialisation – converting electronic holdings back into certificate form – will always be charged for.
Trades often come with other costs from third parties that the broker passes on to you on top of its own fees. Typically, these include exchange access fees, stamp duty taxes, settlement fees, clearing fees and others. These may be on a percentage of the trade value or a flat fee. They are almost always broken out separately in your trade confirmation.
Other third-party fees include bank fees or remittance charges for sending money to settle a trade abroad and similar intermediary costs. These are generally a flat fee. Asian brokers often pass these on directly and break these out separately in their fees, while US and European brokers often treat them as overheads and adjust their commissions to reflect that.
These costs are usually fairly upfront, although not all brokers are good about this and you should always ask whether there are any other costs associated with an account. However, the big hidden costs most commonly come with currency conversions, as we’ll see next.
Understanding currency conversions
There are three main approaches that brokers use when dealing with foreign currencies. Let’s look at them taking the example of a British broker buying Hong Kong shares
If the broker buys shares directly in the Hong Kong market, it may handle the currency transaction in one of two ways:
- Allow you to settle your purchase in sterling or in Hong Kong dollars. When you sell, you can keep your funds in Hong Kong dollars or transfer them back to your sterling.
- Always charge you in sterling and convert that to Hong Kong dollars. When you sell, the Hong Kong dollar proceeds are automatically converted back to sterling.
Alternatively, if the broker buys the Hong Kong shares through a marketmarker in London, the market maker will generally handle the currency conversion. The shares will usually be quoted and traded in sterling.
Clearly, there is the opportunity here for someone to make a bit of extra commission by adding it on the exchange rate you pay.
In first approach, the firm could add a foreign exchange margin (eg 1%) onto the interbank rate that it transacts at each time you transfer funds from sterling to Hong Kong dollars. Many brokers do and – and most are not that good about disclosing this.
Note that if you keep funds in Hong Kong dollars to settle your trades, the firm can’t charge you this. So you want to look for a firm that has low or no FX commission charges and allows you to keep funds in foreign currencies, so to minimise the amount of currency conversion costs you incur.
You may also be able to use an foreign exchange specialist to transfer funds into your account in Hong Kong dollars. An FX specialist’s commission for a sterling-Hong Kong dollar transfer will be less than the commission most stockbrokers charge. (See my article on using an FX specialist for transfers for details.)
In the second approach, the firm can also add a margin on the exchange rate. There is no way of avoiding it in this case, because currency conversion is automatic each time. You need to find a firm that doesn’t do this or (since most seem to) has a reasonably low commission.
In the third approach, the broker cannot charge anything extra for the currency conversion. But the market maker can, since they quote the sterling price. And usually they do; the bid-offer spread on their sterling quote will typically be a few pence wider than the bid-offer on the underlying shares priced in Hong Kong dollars.
Again, there is no way of avoiding this – although hopefully your broker will shop around for the market maker with the most competitive price, where more than one is quoting.
In the comparison tables, I’ve indicated what the FX conversion charge is for brokers where the information is available. Many either don’t readily disclose it or quote adhoc conversion rates with differing spreads from day to day for different pairs.
I’m only aware of two brokers that impose almost no FX conversion charges and simply convert your funds at something very close to interbank rates. These are Interactive Brokers and Internaxx. The latter is the Luxembourg arm of TD Waterhouse – but be aware that TD Waterhouse in the UK follows a different structure, with lower trading commissions but a high FX conversion charge.
It’s also worth being knowing that FX conversion costs can be a particularly headache in certain tax-advantaged accounts such as ISAs. In these, it’s not possible to hold foreign currencies. So all sales proceeds and dividends received must be converted back into sterling each time. This can be costly if the broker you’re using has a high FX charge.