FOOL SCHOOL
Comparing Brokers On Service

June 28, 2002

Here are eight things to consider when comparing brokers on factors other than cost.

1. What type of account do you want?

There are three kinds of broker account available, and you'll need to decide which one suits you best.

• Nominee Account -- The most common service is where you do not get issued certificates at all. Instead, your shares are held in what is termed a "pooled nominee account", a pool of shares that the broker holds on your behalf. There are two main types of nominee account: normal and ring-fenced. If your account is a normal one, then the broker's name appears on your holdings, so the individual company doesn't know you personally are holding the shares. This is by far the most common type of account. With a ring-fenced nominee account, the broker holds your shares in an individual pool in your name. Thus the companies you own shares in know you are the owner, and you are listed on the share register for that company. Many people prefer this system because it means they're entitled to vote at shareholders' meetings and to receive annual reports. More on this later.
  
• Certificated Account -- A certificated account means that the broker actually sends you the share certificates when you buy and you have to send them back when you want to sell. The obvious problem with this method of dealing lies in never being able to pick your dealing times accurately and trusting your certificates through the post. This sort of service is in the minority though it does mean you won't get charged annual fees.

• Crest-sponsored member account -- This is a similar scheme to the nominee account, but one that incurs an annual charge directly from the Stock Exchange rather than simply from the broker. Crest is the London Stock Exchange dealing system, and holding this account electronically registers you as a Crest member. Whenever you trade shares, your details are electronically passed along with the transaction rather than those of the broker, so that the company share register for that stock is automatically updated with your details. Effectively, you become a broker in your own right, with the proviso that your real broker maintains and operates your account for you. The annual charges don't come from the broker, they come from having to register you electronically with Crest. Official information on Crest Sponsored Membership can be found here.

2. Immediate dealing on receipt of order?

Most companies will deal immediately on receipt of a request. Some companies deal only at set times of day to keep costs very low for small trades. If you know that you will absolutely have to trade at an exact time to suit you, then trading at set times in the day is not for you.

3. Is customer service important to you?

Chances are the answer is yes, but how important? If the broker does your dealing, do you care that the e-mail or phone responses you get are curt, albeit efficient? We're not saying that they will be, but if customer service is one of your essential items, we suggest that you form a list of questions and ring up each of the potential brokers to see how they rate on these criteria. You can also check out what other Fools think of your choices by asking on the Brokers discussion board.

4. Do you want to be registered as a shareholder?

Do you want company reports and interim statements delivered automatically to your door? If so, then either the company that you hold stock in has to have your name registered on its share register, or your broker has to provide the service. If your account is certificated, a Crest-sponsored member account or a ring-fenced nominee account, then the company has your details already. If you have a simple nominee account, as most people do, then you either need to obtain the reports yourself by ringing up the company or ask your broker to do it for you. Some brokers provide this service free on request, others charge a fee. You need to decide whether this is important to you. However, it is worth bearing in mind that you can usually access all these reports on a company's website. You can also get many annual reports delivered free from the Fool's annual reports service.

Company reports aren't the only issue here, though. Owning shares in a company means you can attend and vote at AGMs (Annual General Meetings) and take advantage of rights issues (issues of further shares) if you so wish. If the shares are not registered directly to you and you require these services, then you need to see if your broker will provide them on request. If they will, is it free or do they charge? Remember that your broker is aiming to provide a very cheap online service to you without many frills, so expecting to get this sort of thing for free may be expecting too much. However, if you find a broker that will offer it for free, then that gives the broker a slight edge over others you may be considering. Some brokers may offer this service for free by setting higher annual charges. If you don't need these extra services, then you need to decide whether you want to pay the higher annual charges.

5. Do you want foreign dealing?

If you ever want to deal in foreign stocks on other exchanges through this online broker, then you need to identify whether the broker offers this service and, if so, how much the charge is. Some brokers will deal in US stocks, others will do all worldwide stocks, still others specialise in the UK market and one other, such as the Irish or American market. If you intend to open another brokerage account at some point, such as a US or EU online broker, to trade in other markets, then this may be unimportant to you. If this is important, however, then you should contact each of the brokers on your shortlist to see whether they provide what you want.

6. What do you want to do with dividends?

Most companies pay dividends twice a year to their shareholders. Do you want those dividends paid directly to you, or would you like them immediately reinvested in the company? If you want them reinvested, then you need to look for a broker that offers a Dividend Reinvestment Plan (DRiP). Most companies will not offer a DRiP and will just credit the cheques to your trading account or your bank account.

7. Do you ever want ad-hoc statements and valuations?

Most companies provide an annual or bi-annual report on your holdings. What if you want an interim statement or valuation? Do you want the ability to get an instant valuation on some or all of your holdings? Do you instantly need to see how many shares you have so that you don't have to remember the exact amounts yourself? Do you want to see how much cash you have to trade with instantly? Do you want these reports online, automated by phone via a PIN, from a person, e-mailed to you or sent by regular post? Do you mind if you are charged when you request a statement? These are the sort of points you need to be thinking about in this area when you're thinking about the pros and cons of particular brokers.

8. To ISA or not?

Do you want to trade within a Self-Select ISA? These protect your investments from Capital Gains Tax and most online brokers will wrap your investments in an ISA to prevent that Gordon Brown bloke from dipping his bread in your profits. Bear in mind that charges for trading within an ISA may be different to those that apply when trading outside one, so make sure you compare like with like once you've made a decision. Most brokers bundle ISAs for different tax years together so that you only have to pay one administration charge. It is worth double-checking to make sure your chosen broker does this.

More: The Fool's Broker Centre