How I’m investing my savings in my 20s and 30s: A guide

Investing For The Long-term (Retirement)

How to Invest in ETFs, Our Chosen Vehicle

Step 3/3: Picking the Broker

10 min read.

Of course, there are several criteria to use to compare brokers. This Reddit thread goes into great detail on these criteria and how brokers may differ in policies and practices, affecting the service they provide to their customers – you. I advise you to read it.

I’m not going over this issue in great detail. See, we’re very simple customers. We’ll probably just buy a set of 5-7 ETFs throughout our lives and hold them until our retirement. You can’t get any simpler than that. We don’t need our broker to give us real-time stock price data or great research capabilities on a stock’s historical performance and fundamentals because we’re not day-trading and we’re not picking individual stocks. Our requirements are quite simple. When comparing brokers, the most important questions to ask by people with our investment approach should be:

• Country: Is the broker based in the country I live in?
• Safety: Is the broker trustworthy?
• Product: How good is the broker for trading the vehicle I want to trade (ETFs)?
• Price: How much does the broker cost?

Country

The first thing you have to decide is the following: how important is it to you that your broker is based in the country you live in?

The arguments in favor of opting for a domestic broker are the following:

• A domestic broker will help you do the taxes on your investments. They’ll possibly do them for you entirely.
• A domestic broker will be more able to help you with any legal concern because they operate in the same legal framework you live in.
• If by any chance you have an issue with your broker where you want to bring legal charges against them (which does happen), it’s much easier to deal with your country’s justice system than to deal with a foreign one.

The arguments in favor of opting for a foreign international broker are the following:

• Better product. You may be able to find better trading platforms abroad than the ones on offer by your domestic banks (we’ll see why this is not true in Portugal).
• Lower price. Definitely true for Portugal, and I believe in most other countries. Internationally, you have the so-called online “discount-brokers” where you pay a very small commission for trades and many times no yearly fees.

Let’s tackle the other criteria so that I can comment on these arguments with the whole view of what’s at play when choosing your broker.

Safety

You definitely want your investment money to be in the hands of a solid, respectable institution. This is your retirement money. It will most likely represent most of your wealth. Do not take this point lightly.

Again, the Reddit thread I linked to above will give you a very good start at understanding what is at stake when choosing a broker. For example, brokers can store your money in more or less safe manners, they can be insufficiently capitalized to deal with an unexpected high withdrawal volume when investors get scared, and they can even execute orders in ways that benefit them at your detriment.

Note also that not all brokers have an underlying bank. Although many brokerage services/platforms are offered by banks, others are not part of a bank. They’re just brokers. As a general rule, using a broker that is backed by a bank should be safer because banks are more heavily regulated, so less able to adopt hazardous practices, and they should be more capitalized (see Tier 1 Capital).

Also, do some research on brokers’ customer support – how responsive they are and able/willing to help their customers.

But remember that, in the end, you probably won’t do all the research required to make a fully grounded decision on how safe a broker is. I didn’t. It’s just too complex. As with so many other purchasing decisions, we’ll probably decide based on the companies’ appearance and our personal whims, and that’s ok. Just keep in mind that you want your investment to be safe, even if that entails paying more.

Product

Criteria to Assess a Broker Product

As I said earlier, because we are only going to trade seldomly and buy just a few pre-defined ETFs, having a super-duper-cool trading platform is not a necessity. Still, you’ll want it to at least:

• Have high availability and stability. You shouldn’t experience any crash in the service.
• Be user-friendly. Trading platforms can be bloated with functionality, which makes it harder for casual investors to perform their simple trades. InteractiveBrokers, from what I read, is criticized in this aspect, while Saxo Bank’s platform is among the easiest to use.

As a plus, a platform that offers good research capabilities can also be of value if you’re considering doing some stock-picking in addition to our ETF-buying-and-holding strategy. Research capabilities stand for offering deep data on a stock, which allows you to do your research and make trading decisions right from the platform, without having to rely on external data sources. See, there’s a chance that we’ll develop a taste for trading, and therefore that we’ll do some “fun-investing” by buying some stocks that we like. If you can see yourself having some fun trading, then you should include in your criteria how good the platforms’ research capabilities are.

Note, however, that I call this “fun-investing”. As repeated many times, there’s very little chance that you can consistently pick stocks that will outperform the market. So you should only use a small part of our portfolio for this “fun-and-high-risk” investing, a part that you’re willing to lose entirely. Treat it like it was money for the casino.

You’ll find several reviews online and people discussing their experiences with different platforms in forums, so you’ll be able to find the platform that is more to your liking. I’ll just say two additional things.

Brokers’ Niche

First, like in any other business, trading platforms have their niche. So a trading platform can be among the best in trading one asset class (for example, currencies) and be a shit trading others (for example, ETFs).

To be honest, I didn’t dive too much into how different it is to invest in different asset classes. I soon decided to invest in ETFs and forgot the rest. But I can imagine that the experience should change a lot between investing in stocks, or in currencies, or commodities (like gold), or in complex financial instruments (like swaps). The information that the investor requires must be specific to each asset class. So this might help explain why brokers may prefer to specialize in one asset class, or in trying to offer a service for several classes, end up being better at one or a few.

The conclusion is: because we’ve defined that we want to trade ETFs, we should search online for “good ETF brokers”, or “good stock brokers” (because ETFs belong to the stocks asset class), not “good brokers” in general. When you create an account in a broker platform, you’ll probably have to configure the asset classes you’ll trade. You’ll choose the “Stocks and ETFs” options, or just “Stocks” if ETFs are not listed.

Trading Through Your Current Account Vs. a Trading Platform

The second thing I want to add about the product aspect of choosing your broker is the following. Many Portuguese investment banks have two offerings. They allow you to:

• Invest through your current account on the bank’s website, without using a trading platform.
• Invest through a trading platform.

The first tends to be cheaper than the second option but it is quite limited. It offers fewer ETFs than proper trading platforms, and you don’t get half as much information as to when you’re trading with a platform. Also, I don’t know exactly how an order through your current account is executed. Is the website communicating directly with the stock exchange, or does someone in the back office have to receive my order and execute it himself manually?

Moreover, when small- to medium-sized banks offer a trading platform, they are most likely reselling a platform from another provider. Developing and maintaining a platform must be too expensive for a bank operating in a market like Portugal. So instead, banks partner with international providers and resell their platform to their Portuguese customers. For example, Banco Invest resells InteractiveBrokers (IB) and BiG resells Saxo Bank’s platform, both among the most highly-rated trading platforms for ETFs in the World.

This translates to you being able to get a very good product while investing with a bank based in your home country, with the benefits discussed above. For me, this is a definite plus. Nevertheless, banks do not promote this. They tend to offer these platforms under another name, pretending to be their own. I don’t understand it. As a consumer, I prefer to think that I’m trading through a well-established, well-tested platform with tens of thousands of users and about which I can read online extensively than to use a small platform probably built with an insufficient budget and terrible code. (For those who know me, note that I’m aware that I did with omeututor.com exactly what banks do with these platforms, but oh man, how terribly wrong I was at a lot of things with omeututor.)

Still, if the bank offers the ETFs you want to invest in through their website, taking the money directly from your current account, and if the price justifies it, you should definitely consider going for the more limited but cheaper option.

Price

Price is also simple. Brokers have three different charges: trading commissions when you buy or sell an asset, income commissions on distributed stock dividends and bond interests, and annual fees (many times charged every 3-months).

How heavy each type of charge will be to an investor naturally depends on his investment style. If you’re a frequent trader, then you’ll look for the broker with the lowest trading commissions even if the annual fee is relatively high. On the other end, if you’re only going to do a few trades a year, which is our case, then trading commissions, although relevant for sure, are not so heavy compared to the annual fee.

You can find a list of charges here: broker-analysis.xlsx. You’ll see that it only includes banks based in Portugal. I did consider some international discount-brokers, like Degiro, because they’re prices are in fact very, very attractive, but for the reasons mentioned above – mainly about safety and the advantages of using a domestic bank – I soon decided on working with a domestic bank.

BiG: The Broker I Chose

I ended up opening an account with BiG and I’m using the platform they offer. The platform is Saxo Bank’s which, according to the reviews I read, is exactly my preference.

It was important to me to deal with a bank based in Portugal. I expect to have most of my wealth in this platform, so I really don’t want to take any unnecessary risk with who holds it.

Among the accounts with a trading platform, it’s among the cheapest. Only Banco Invest, which offers InteractiveBrokers’ platform (also very good), is cheaper. But I ended up preferring BiG for two reasons:

• I prefer Saxo Bank’s platforms than IB’s, which Banco Invest resells.
• Among the several calls I made with bank reps both at BiG and Banco Invest, I preferred the interaction with BiG’s. They’re great.

BiG’s mobile app seems to be a shit though. It has a 2,6 rating on Google Play compared with ActivoBank’s (my bank for every-day tasks) 4,2 rating. My experience with BiG’s app, although very very short, was terrible already. Still, since it’s not going to be my every-day bank, but only the provider of my trading platform, I don’t expect to use the app at all.