Discount Broker - Is It Right For You?

If you are a newcomer to investing, you may wonder how you can be sure of getting the best return on your money.  Even if you’ve been investing for some time, you may still feel dissatisfied with the returns you are receiving.  Either way, a useful solution could be to use a discount broker.

A discount broker is a specialist investment company that sells funds and rebates most or all of the charges to the investor.  This means, for instance that you don’t pay the up-front charge – usually about 5% - that you would pay if you purchased directly from the fund provider. 

A discount broker is an “execution only” service.  That is, you don’t receive advice about the best investment – the broker just carries out the transaction.  The broker’s income comes from the ongoing trail commission paid on the annual management fee.

So what are the advantages of using a discount broker?

• Purchasing through a discount broker can save you a considerable amount of money and you can you save on the initial charges for purchasing the fund,
• The advantages are most evident to those using long-term investments.  The saving on the initial charge added to the yearly reduction may look like a small amount individually, but cumulatively can have a major impact on your long-term returns.
• Thanks to discount brokers, investing becomes accessible to small investors.  Using this method, many more people can afford to invest in the market.

However, there are also some disadvantages, so using a discount broker may not be right for everybody.

• A discount broker is a “no frills” service.  You don’t get advice so it may not be suitable for you if you are an inexperienced investor.  Some brokers do provide free guides with analyses of leading funds and recommendations, but of course these aren’t tailored to your personal circumstances.

• Because you make the decision yourself, you are on your own if the fund doesn’t perform well.  You have no recourse for complaint or compensation.

• Orders for purchase can be taken by call-centre staff.  So it can seem quite impersonal compared with using a normal broker.

If you are at all doubtful about your ability to pick the right investment fund, you would be much better advised to use an investment adviser or IFA.  If you make a mistake when picking your fund, it could more than wipe out any savings you might make by using the discount broker service.  But when you have built up experience and a “nose” for investment, you could find that using a discount broker could make a big difference to your investment returns.

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