If you’re a British investor then you’re currently spoilt for choice when it comes to selecting an investment account.
Stockbrokers and wealth managers have proliferated over the last decade, with over 10 of the top 50 stockbrokers by assets under management having been started in the last 5 years alone.
This trend paints a picture of a financial services industry under constant attack by new start-ups and fintech businesses. In this article, we’ll uncover how the ageing stockbroking industry is being forced to evolve under this pressure from newcomers.
Increasingly, we find that the best UK stockbrokers have been trading for fewer than 10 years. By offering new features and re-writing the rulebook, newcomers have found themselves unencumbered by legacy obligations and the entrenched expectations of an older client base. They’re using this to their advantage in a big way in the UK.
Freetrade, eToro, Orca, Trading212 and Stake are just some of the new names which have emerged onto the UK investment scene in the last 10 years.
UK stockbrokers that don’t market themselves as brokers at all
In fact, this is the tip of the iceberg. Beyond these ‘pure’ share dealing services, there is a host of money apps that also perform similar investment activities.
You may have seen adverts for these user-friendly money coaches online. They typically take the form of an app that connects to your bank account (or provides one of its own) and uses algorithms to carefully judge small sums of money from your current account into the stock market or bond investments. It tracks spending and income patterns to determine when and how much to invest. Examples of such apps include Moneybox, Chip, Emma and Revolut.
The investments themselves are usually cheap equity and corporate bond ETFs, which are blended in a ratio that matches your risk profile. These apps build a picture of a users risk profile by asking a series of questions designed to build an image of what risks the user can tolerate and how long they expect to be able to lock away their funds.
So, between lightweight share trading platforms and broader money apps, the younger demographic of saver are being nudged away from traditional investment providers and towards these new organisations.
Why are UK stockbrokers so prolific?
So why is the UK now home to so many of these young start-ups? Why do the British Isles attract the capital, ideas and talent to help incubate these bold business models?
A part of the answer lies in the existing reputation and status of the nation’s capital; London. Despite Brexit, London remains a preeminent place to headquarter a financial services business.
More broadly, financial services form 6.9% of the UK economy according to a recent government report. Such a large sector supports many talented works, who mainly settle in London to work for the largest banks, insurers, stockbrokers and wealth managers.
This provides a ready-made pool of human capital ready for any hungry start-up to tap into. London is a melting pot of financial services talent, for the right price. Any well-funded UK stockbroker firm finds itself well placed to bring onboard the best people with the ability to execute.
What are the new breed of stockbrokers doing differently?
Earlier in this article, we referred to the new cohort of investment apps as a disruptive force in UK brokerage circles. What business model do they employ and what has driven their success so far? Let’s take a closer look.
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Driving down the costs of trading
These UK ‘broker 2.0’s have targeted trading commission/trading fees as an opportunity to differentiate their service from traditional rivals.
Newer brokers are likely to offer very low transaction costs when buying or selling shares, such as £1 per trade. Many new apps even offer trades at zero commission.
This bold pricing strategy allows them to position themselves as the only sensible choice for active traders. ‘Why keep paying trading commission at all?’ they can ask clients as they lure them away from brokers who have previously held their business for many years.
Is this a sustainable business model? Well, new brokers are likely to offer other more lucrative investment products to generate profits instead of standard trading. These include higher risk services such as Contracts for Difference (CFDs) and margin trading.
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A pivot towards an app experience
It’s a compelling point but isn’t the only differentiating feature. The new brokers are likely to be app-led. Some don’t even provide services via a website at all. This allows the broker to reduce development costs by only focusing on a single point of access. In contrast, a large brokerage such as Hargreaves Lansdown must maintain an app, a website and a fully-staffed call centre around the clock to serve their customers.
By keeping things simple, new UK stockbrokers are keeping their operating models lean and this increases the sustainability of a price war on trading fees.
Interesting related article: “What is an Investment?“