Back in the 1980s, UK banks engaged in a dogfight for customers which resulted in free banking for all.
And now, competition in sharedealing and other financial services is becoming so intense that commentators wonder if it could go the same way. As the number of online brokers grows, dealers are increasingly cutting costs to seek new clients.
This week, Halifax announced that anyone buying shares through its ShareBuilder scheme would be charged no dealing fees for the rest of the year.
Investors who use the scheme as part of a regular monthly investment plan usually pay £1.50 in commission per trade but, for the next four months, they will not be charged anything for any shares they buy. At sale, though, they will be charged between £5 and £11.95.
Other brokers such as TD Waterhouse and Alliance Trust are also trying to lure customers with similar offers of free dealing for a limited period.
But even without the free deals offer, Halifax’s commissions look small. The minimum commission for most brokers is between £9 and £20, but Halifax and The Share Centre offer deals for £1.50 and £2.50 respectively.
The catch is that investments are not purchased in real time. The brokers group together orders for trades and execute them all together at the same time. By aggregating deals in this way, they can keep costs low. If you do want to deal in real time at Halifax, the online cost is £11.95.
Still, Halifax argues that its service is a cost- effective way to start a portfolio, and an effective way to smooth out market fluctuations, through regular savings.
Other brokers are now freezing or lowering their commissions in response to the heightened competition.
Hoodless Brennan, one of the dealers that cut commission charges this year from £7 to £6.50 for frequent traders, said its prices had not risen since March 2003. Mark Rayden, product development manager, says he has reason to hope prices would continue to be reduced for investors.
The majority of costs for brokers arise from transactions, according to Rayden.
“Rivals to the LSE such as Plus Markets are offering cheaper reporting,” he says. “And there is a chance we could be moving more towards an American exchange model. In the US, booking a trade costs between £1 and £2, whereas here it is more like £5 or £6. If we had cheaper gateway costs, prices would fall for consumers.”
The deal that SIS, a Swiss clearer, cut with the LSE in June to offer share transaction clearing could also bring down costs – as SIS will start to compete with the company that used to monopolise the system: LCH Clearnet.
The Association of Private Client Investment Managers and Stockbrokers (APCIMS), says that such new agreements are likely to continue when the European Commission’s plans to create a single market in financial services (known as Mifid) are introduced. They will increase cross-border competition and theoretically bring down costs for customers.
Gareth Syms, investor centre manager at TD Waterhouse, and Claudia Philips, managing director of investment dealing at Alliance Trust Savings, both say it is not inconceivable that the UK might follow the North American method of charging 0 per cent commission for share purchases.
Alliance Trust, which only entered the share dealing market recently, is offering customers the chance to buy shares at no cost and sell at a reduced cost of £5 until the end of September.
Most stockbrokers also distinguish between standard and frequent investors and vary their charges accordingly. TD Waterhouse charges a £12.50 flat fee for investors who trade up to six times every quarter and £11.95 for those who trade more often. It also offers side benefits to frequent traders, such as extended settlement.
“Over the last few years our charges have come down and we took out a third tier to simplify the structure,” says Syms.
However, some brokers, such as Nick Raynor at The Share Centre, think the trend could reverse if sale commissions drop, because brokers will seek to recoup costs elsewhere – for example, in sale charges, fixed costs or lower interest rates for cash balances. “I do expect dealing charges to continue to fall,” says Raynor. “But as they fall, then alternative charges will almost certainly rise.”
A full survey of stockbrokers’ charges will be published in Investors Chronicle on September 21. For details of brokers, see www.find.co.uk
