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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 investing assets. Your investing 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:

1. Why do people invest through their banks?

Investors may pick their banks as investment brokers for a variety of reasons. The most obvious reason for their selection is that they want to feel safe with their money. Banks have the opportunity of providing 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 had 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.

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.

2. 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 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 in an independent broker are the same as those of investing via a bank because banks do not give 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 trading shares will likely be more expensive than independent broker counterparts. Banks also have a limited amount of securities, funds and options available, compared to independent brokers who have access to more varieties in terms of investment assets.

3. 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.

Banks certainly have a place in your financial plan. They are ideal 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 make the best 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.

Last update: 11/03/2022

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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.