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Should you choose your bank or a broker for your investments?

It's just as crucial to pick a broker as it is to pick your investment assets. Your investment style, the amount of flexibility you have with your investment, and the charges may all be determined by your broker. Many novice investors begin by investing through their banks, believing that institutions are more secure than independent brokers.

Learn from our article whether you should invest with a bank or an independent broker:

Why do people invest through their banks?

Investors may pick their banks as investment brokers for a variety of reasons, several of which are actually beneficial for the investor. Some prefer banks because they are available everywhere or because the investor assumes that banks are safer. But most prefer banks because many are unaware of non-bank financial advisory options. It should be considered that everyone grew up with banks as their main source of finance, from savings to pensions. All services are consolidated into a single firm that provides savings accounts, cards, insurance, tax handling, and retirement. All of these services are under one brand, which is represented by a large group of professionals with different credentials, services, fee structures, and marketing. You may have to work with several professionals to manage your finances. Therefore, access and understanding these services and their payment structure becomes easier and more comprehensive for clients because all the services come through the bank's group of companies.

Is it better to invest through a bank?

Should you invest through your bank? The answer is, it depends on the investor's financial circumstances whether investing through their bank is beneficial for them in the long term. Banks can be an easier option for first-time investors as they can provide all services, from the investment itself to the support required to make the investment. Banks provide both savings accounts and investment accounts between which you can conduct transactions. They also take on the roles of your financial advisor, tax withholding agent, and platform provider. Banks are one of the most important players in the financial system. They turn savings into long-term capital so that private sector investments can be financed. If you wish to simplify your investments, banks may be a good idea for you.

What benefits can you get from investing through banks?

The most obvious benefit of investing through a bank is that banks have the opportunity to provide mandatory guarantee funds up to a specified level for your investments. This sum is fixed at a minimum of €20,000 per investor in the EU under Directive 97/9/EC.

Because you already have a bank account with them, you won't have to go through any additional onboarding procedures as you have already completed the majority of the KYC processes when you opened a savings account with them.

Banks enable you to consolidate your financial activities into a single institution. You maintain all of your savings and assets in one place, making it easy to trade with your money. You do not need to use your bank or credit card separately to contribute money. You can access consultancy services through the bank's professional advisors, such as, the teller, investment advisor, or portfolio manager.

Banks also provide research tools and information that an independent broker may not provide. And, especially if you pick active investment funds, your investment management is more personalised and tailored to your financial circumstances.

Main differences between investing in a bank and through brokers

The investment services offered through your bank will likely be similar to those received through an independent broker firm. The differences, therefore, do not affect their ability to provide secure services. Rather, the differences between a bank and an independent broker lie in the structure of the services and client perception.

Most investors prefer to have high control over their own portfolio without having any involvement from the firm. They may prefer their brokers to be just online platforms meant to invest and trade through. Traditional banks are not known for being "hands off" with their clients. They provide high-involvement services where they can actively manage your investments alongside your savings, mortgage, insurance, and other banking services you might be using. Independent brokers do not try to do everything for investors. Rather, their aim is narrower to investments and trading and they rely on more client-focused development. For example, Robinhood offers a simple micro-trading digital platform for retail investors to trade easily while paying zero commissions.

When it comes to investments, traditional banks charge higher fees. This is because traditional banks have a very different way of doing business than other online trading platforms. On top of transaction fees, big banks have often used a model based on subscriptions. Under the subscription model, customers pay a monthly fee to use the bank's services, including their investment services. Independent trading and investment platforms charge only on a transaction-based model.

Banks use the subscription model because it helps them build long-term, loyal relationships with their customers, which in turn gives them a steady stream of income.

Why your bank may not be a good broker?

The most straightforward reason to not choose your bank is that there are just better solutions available. Even mandatory guarantees have their limitations in terms of investment. It only covers your funds up to a maximum of 20,000 EUR per depositor. While it may appear to be a large sum of money, you should aim for considerably larger sums if you're a long-term investor.

The guarantee protection does not apply to asset issuer bankruptcies, general investment risks, or market losses. It covers fraud, misappropriation of investment funds, and any other investment mistake. On the other hand, most independent investment brokers now provide identical assurances for the same sum and under the same terms. As a result, the dangers of investing with an independent broker are the same as those of investing with a bank because banks do not provide an additional layer of security.

Banks also charge higher fees than independent brokers. Management fees can range from 1% or higher. Domestic share trades can be free, but globally traded shares will likely be more expensive than their independent broker counterparts. Banks also have a limited number of securities, funds, and options available, compared to independent brokers, who have access to more varieties in terms of investment assets.

What benefits can you get with an independent broker?

When we talk about independent brokers, you're probably thinking about discount brokers or zero-commission brokers, which allow you to trade stocks for no or extremely cheap charges. Since the launch of Robinhood, larger investment firms have likewise eliminated commissions from their services, allowing investors to invest without the fear of fees cutting into their earnings. Many don't demand you to have a certain amount of money in your account to invest. If you invest in funds, discount brokers charge lower management costs than banks, ranging from 0.2% or lower. Consequently, you have greater control over your money and assets due to a lack of investment barriers and more varieties of assets.

Trading with discount brokers is both efficient and time-saving. Thanks to innovative and speedy systems, you can place and execute orders in real-time. They also provide sophisticated and simple UI-based analysis tools that allow you to intelligently analyse your stocks and trade autonomously, and they are more likely to be up to date on new technology, such as paperless account opening, which eliminates paperwork.

What are the risks of investing through an independent broker?

The risks of investing through a broker are not specific to the firm itself. Investing through a broker has the same risks as general investment—financial, regulatory, political, market, and operational risks. As the protection offered by brokers is similar to that offered by traditional banks, there aren't any studies on risk differences between investing through a broker and investing through a traditional bank. Most likely, the losses will occur due to the investor's behaviour, and in the regulatory environment, the responsibility is on the investor and not the broker firm.

Some brokers' compensation funds may not cover commodities transactions, future transactions, or currency transactions, but that is not a risk characteristic of independent brokers as a whole. In the end, most likely, the investor's own behaviour is a risk factor of investing through an independent broker, as the investor will be monitoring and managing his own investments without professional supervision.

Which is better for investments - a bank or a broker?

It depends on a variety of factors, such as investor goals and circumstances. One may prefer banks if the goal is to simplify the overall finances of a person, such as having savings, pensions, and investments all under the same group. But many brokers nowadays also provide pensions and tax-advantaged retirement accounts alongside external investments and trading. With the exception of saving accounts, almost all established brokers are registered and licenced and offer the same benefits as banks with additional perks such as low to zero commissions, more investor control, flexibility, and easy access and withdrawals.

Summary

Banks have played an important role in our upbringing. They are seen as safe havens by the general public. A lot has changed in finance in the last fifty years, and there are many reputable and affordable rival independent brokers to pick from that are just as secure. Independent brokers also have a more inventive approach to financial consulting. As a financial institution, banks play an important role, but their primary function is to facilitate liquid access to savings accounts. It's generally agreed that independent brokers make superior investments because they're cheaper, more flexible, have fewer conflicts of interest, and are more dynamic in terms of the user and trading experience.

Banks certainly have a place in your financial plan. They are ideal for emergency funds and making payments. But banks are rarely ideal for investing as their fees are high and their choices for securities and options are low. To get the most out of your financial planning, it is better to use banks for primary financial needs and use independent brokers to grow your finances once you reach a stable stage.

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Disclaimer: Some text on this website is purely for marketing communication. Nothing published by Quanloop constitutes an investment recommendation, nor should any data or content published by Quanloop be relied upon for any investment activities. Quanloop strongly recommends that you perform your own independent research and/or speak with a qualified investment professional before making any financial decision.