Types of stockbroker: which one do you need?

When you decide to buy shares, one of the first choices you face is who you actually use to do it. There are three broad types of service available: execution-only, advisory, and discretionary. They differ significantly in how much involvement the broker has in your investing decisions, and in what they cost. Understanding the differences before you open an account will save you money and avoid frustration later.

The execution-only broker is the most common type in Britain today, and for most private investors it is the right choice. The name says exactly what it does: the broker executes your orders and nothing else. You decide what to buy and sell, you place the trade, and the broker carries it out. There is no advice, no recommendations, no hand-holding. That might sound sparse, but it is also the reason execution-only dealing is so cheap. Platforms such as Hargreaves Lansdown, AJ Bell, Trading 212 and Interactive Investor all operate on an execution-only basis. Dealing charges on shares typically range from zero to around £11.95 per trade, depending on the platform and how often you trade. The annual platform fee is usually a percentage of the value of your account, capped at a fixed amount for larger portfolios.

Execution-only works well for anyone who is willing to research their own investments, comfortable making their own decisions, and focused on keeping costs low. The trade-off is that you are entirely responsible for what you do. The broker has no duty to tell you if you are about to do something unwise. That is not a flaw in the system; it is the deliberate arrangement. You are treated as an adult investor capable of making your own choices.

The advisory stockbroker occupies the middle ground. Here, the broker makes recommendations and suggests investments, but the final decision remains yours. You might receive periodic calls or letters suggesting that now is a good time to top up your holding in a particular company, or that you should consider reducing your exposure to a sector. You are not obliged to follow the advice, but you are paying for it. Advisory services are considerably more expensive than execution-only, typically involving higher dealing charges plus an annual fee or retainer. Some advisory brokers have minimum portfolio sizes, meaning the service is aimed at investors with a substantial amount to invest.

Advisory services suit people who want some guidance but still want to feel in control of their money. They can be useful if you are time-poor, lack confidence in specific areas such as income investing or international stocks, or are managing a portfolio large enough that the cost of advice is proportionally small. The key thing to understand is that the advice you receive reflects your stated goals and risk tolerance, but the broker does not manage your money for you. You still have to pick up the phone or log in and place the trade.

The discretionary stockbroker goes furthest of all. Under a discretionary mandate, you hand over responsibility for managing your portfolio entirely. The broker or wealth manager makes all the buying and selling decisions on your behalf, within agreed parameters. You will typically set out your investment objectives, your attitude to risk, and any constraints you want applied (for example, no tobacco stocks, or a focus on income). Within those boundaries, the manager acts without needing your approval on each individual trade.

Discretionary management is the traditional model for people with significant investable assets, historically upwards of £250,000 to £500,000, though some firms have lowered their minimums with the rise of digital wealth management. The charges reflect the level of service: an all-in annual fee of 1% to 2% of assets managed is typical, which can add up substantially on a large portfolio. On £500,000, a 1.5% fee is £7,500 per year whether the portfolio goes up or down.

The arrival of robo-advisers has blurred some of these categories. Services like Nutmeg, Moneyfarm and Vanguard’s managed portfolios automate something close to discretionary management at a much lower cost, using diversified fund portfolios rather than individual shares. These are not stockbrokers in the traditional sense, but they fill a similar space for investors who want their money managed without a large minimum balance or high fees. They are worth knowing about, even if they fall outside the strict definition.

When choosing between the three types, the honest answer for most people starting out is execution-only. The costs are transparent, the platforms are well-designed, and access to information has never been better. The Financial Times, company investor relations pages, free tools from the likes of Morningstar and Stockopedia, and a decent annual report will tell you most of what you need to know before making a decision. Paying for advice only makes sense when the advice is genuinely valuable and the cost is proportional to what you have to invest.

One practical point worth making: whatever type of broker you use, check that it is authorised and regulated by the Financial Conduct Authority. The FCA register is free to search at fca.org.uk and takes thirty seconds to check. Every regulated firm offering stockbroking services in the UK must be on it. If a firm is not listed, do not use it.

TL;DR — the short version

• Execution-only brokers carry out your orders without offering advice, and are the cheapest and most common choice for private investors.
• Advisory brokers make recommendations but leave the final decision to you, and charge significantly more for the service.
• Discretionary managers take over the day-to-day running of your portfolio entirely, within parameters you set, and are typically aimed at larger portfolios.
• Robo-advisers offer automated portfolio management at lower cost, sitting between execution-only and full discretionary.
• For most people starting out, execution-only is the right option: costs are low, platforms are strong, and you remain in control.
• Always check that any broker you use is authorised and regulated by the FCA before opening an account.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.

This article is for informational purposes only and does not constitute financial advice. Investment values can go down as well as up. Always do your own research before making any financial decisions.