What should you consider when choosing a broker?
Updated: Sep 4, 2021
Choosing the right broker isn’t easy! Especially when there are so many platforms offering like for like services. However, with the number of retail accounts at an all-time high, it is more important than ever to shop around before you fund your account.
The vast majority of traders lose money and only around 12% are profitable.
Social media has facilitated a large number of get rich quick FX trading related scams that are highly visible and have created an atmosphere of distrust.
Your broker is likely to provide the markets, prices, execution and technology you trade on. This is not a level playing field and you need to use a reputable broker that invests in you as a long-term client.
How should you choose a broker?
Platform ease of use, reputation and secure deposit and withdrawal are the key elements you need to look for before confirming that the broker offers the markets you want to trade.
Price is of secondary importance, poor execution and slippage are far more detrimental to success and if you can’t withdraw your funds then the headline spreads offered are of little relevance.
But how do you determine whether a broker is secure and reputable?
1) Where are they regulated?
Brokers often boast of their regulatory status, however, not all regulators are equal!
You should also look to see if the broker is regulated in the country, you reside in. If things go wrong, your proximity to the regulator will make recourse much easier.
Is the broker regulated by one of the more stringent regulators such as the FCA, CFTC, FSA or MAS? These regulators are extremely diligent in policing regulated entities.
2) Which entity will you be trading under?
You may be trading using an FCA broker, but this doesn’t necessarily mean you are protected by the FCA’s governance. Brokers often use numerous group entities, some of which may be unregulated or underregulated. Clients trading under these entities are not legally entitled to the same levels of protection.
3) Is the broker listed and does it have a transparent ownership structure?
Brokers listed on major stock exchanges undergo additional scrutiny and are legally obliged to be more transparent. Their business model, how they make money and elements of their strategy are publicly reported.
4) How reliable is the deposit and withdrawal mechanism?
When choosing a broker it is wise to fund a small amount of money, place some trades and make a withdrawal. You are then able to think about whether there were any issues, how long the process took and whether you feel comfortable making a higher deposit.
5) How responsive is the broker when things go wrong?
Brokers will always respond quickly to client account opening enquiries, especially as client acquisition costs are so high. But will they assist when a funded client has an issue? Whilst testing the deposit and withdrawal mechanism, give the broker a call, use their chat function and see how helpful they are.
6) How did they behave in a previous market crisis?
Finally, you should consider how the broker behaved in a previous crisis and whether they came under any regulatory scrutiny. This should be fairly clear from a basic online search. You should consider their conduct during the 2015 Swiss Franc crisis, 2020 Brent Crude Oil Crises and the recent scrutiny over 2021 U.S. small cap equity volatility.
Choosing a broker isn’t as easy as it first seems, it is certainly worth investing the time in researching what’s on offer and ensuring that the broker you choose is investing in your future as a loyal long-term client.