Low Fees Aren’t Enough: Pros & Cons of 5 Broker Types in Europe
Definitive guide to choosing a stock broker - Part 2
This is part 2 of Bankeronwheels.com’s Definitive Guide to choosing a Stock Broker.
Most comparison sites lump brokers together, as they don’t have an in-depth knowledge of how investors think about counterparty exposure and products. Most of the websites are also conflicted, often promoting brokers with the highest-earning commissions. We take a more professional angle. How would an institutional investor categorise them?
Discover Banker on Wheels Broker Classification System developed internally by our team based on our professional experience.
It’s our conceptual blueprint for navigating the European brokerage landscape, though remember, not all brokers fit neatly into the 5 boxes.
KEY TAKEAWAYS
- Traditional Brokerage Arm Of A Bank – like HSBC, Lloyds or SocGen are integral to global financial system. These brokers offer reliability due to their banking affiliation, but often at a higher cost, and may not have the depth of products as they are non-core to Bank.
- Bank-Backed Fintechs – like Fineco, Boursobank, Fortuneo orn Consorsbank are digital-first direct-to-consumer leaders, offer banking group affiliation – often with digital banking services – and the benefits of lower costs.
- Tier 1 Pure Play Platforms – like Interactive Brokers, Swissquote or SAXO may hold banking licenses, but focus primarily on brokerage services. Banking is non-core, and they are typically not owned by a Bank. They offer competitive rates, and in-depth products. Some in this category – like Interactive Brokers – may be listed on a Stock Exchange and/or rated by a Rating Agency.
- Neobrokers or Tier 2 Pure Players – like DEGIRO, Trading212 or Scalable Capital offer highly competitive pricing and user-friendly platforms with an international reach, making them attractive for beginners, but investor average balances remain low. They often also have a weaker/unproven business model and may use hidden costs like purpose built single market maker exchanges with higher spreads where they route most of their trades. Often, users are unaware of these costs.
- Speculative Platforms or Tier 3 Brokers – like eToro focus on expensive and speculative products like CFDs and cryptocurrencies, lack core ETF offerings for long-term investors, and potentially operate under less stringent regulatory oversight. For us and most long term investors, they are a no-go.
Our broker Classification system
What are the big differentiators?
Being Part Of A Banking Group, Product Depth & Client Sophistication
5 Categories of Brokers (CLICK ON EACH TO ZOOM IN)
European Brokerage Landscape - Interactive Chart
Banks
Fintech
Platforms
But, they have a few unique characteristics making them very attractive for beginners, and a potential broker diversification play for more advanced investors. They are Very Cheap. Most of them offer zero-commission ETFs and are overall very cheap for small and often also larger trades. They lead all categories in that respect. They have Industry-leading Platforms. Their platforms and mobile Apps are leading in terms of usability and interface design, high-level reporting and account opening process. They have International Presence. While Banking Brokers and some Tier 1 Pure Players may be local, Tier 2 players are usually present in most EU countries, and the UK.
To categorise brokers we use two differentiating dimensions:
- Pure Players vs. Banking Group Brokers – Pure players (3 boxes on the right side of graph) are independent from a Systemically Important Banking Group. They specialise in brokerage business. They may have a banking licence, but these activities are non-core to the business, and not systemically important. Then, there are Brokers that are part of a Systemically Important Banking Group (2 boxes on the left side of the graph).
- Client Sophistication and Product-Suite – Pure players can be broken down into tiers. Tier 1 are the most sophisticated, and often have a portion of their revenues derived from Institutional Investors. Tier 2 are neobrokers mainly for beginners. The last Tier is incompatible with long-term investing. Brokers within a Banking Group can be broken down in two types – Traditional Broker Arms, for which Brokerage is a non-core activity and Fintechs backed by banks – that have a brokerage business at their core.
The Brokers in this article are illustrative, and not meant to be exhaustive. We use a few examples to show how we conceptually categorise them, including possible types of Brokers found across Europe and the UK. You can find the broker category in the upper right corner of each broker review. This framework is Pan-European. Not all countries have all category types. Browse our other guides to understand landscapes within specific countries.
1. Brokers Backed by A Banking Group
First, let’s have a look on the left side of our graph.
The Broker or its parent is often labelled as Global systemically important institution (G-SII). They are vital to the financial system in a country or Economic Area. They are highly regulated, which is a key safety aspect.
Two types of brokers within banking groups
European Brokerage Landscape
Banks
Fintech
Platforms
1.1 Traditional Brokerage ARMs of Banks
HSBC, Lloyds, BNP Paribas, Société Générale, Bankinter etc.
These brokers are part of an established, and usually Systemically Important Banking Group (G-SIB). They are often rated, listed on a Stock Exchange, and transparent. However, they have several drawbacks. They may be:
- Non-Core – these brokers are typically an auxiliary service to the established banking group.
- Relatively Expensive – they are usually not very competitive for long term investors, but exceptions apply. In some cases if fees are low, these may be great brokers.
- Lacking Depth Of Products – may miss access to some markets for advanced investors.
Examples include HSBC or Barclays (UK), BNP Paribas or Société Générale (France), Bankinter (Spain and Portugal).
Pros & Cons
- Likely Systemically Important Bank
- Most likely Rated
- Most Likely on Stock Exchange
- Most Likely Transparent
- May Need Banking Relationship
- May Not Be Fully Digital
- May Be Expensive
- May Not Be Sophisticated
Suitability
POTENTIALLY Suitable
PART OF a BANK, but CHECK FEES
POTENTIALLY Suitable
broker diversificatioN
Potentially Suitable
Bank Safety, but LOW product RANGE
1.2 BANK-BACKED FINTECHS
Boursobank, Fortuneo, Bolero, Comdirect, Fineco etc.
Brokers in this category have a direct-to-consumer (minimal traditional infrastructure) business model, often a modern and mobile-friendly approach to clients. They are typically part of banking groups of significant importance. The core difference with the first group is that they are:
- Modern And Independent Leaders – they could be pure players in their own right (some like Fineco are). Fineco or Boursobank even offer banking, advisory or asset management services. Most operate without branches, and have good mobile apps.
- Relatively Cheap – while the first group was expensive, brokers in this group are very competitive for long term investors.
- Tax Reporting – Given they are local players, tax reporting is usually good.
Examples include HelloBank (BNP Paribas), Fortuneo (Arkéa), Boursobank (Société Générale), Bolero (KBC Bank) or Comdirect (Commerzbank). Fineco is an exception as it is independent integrated financial group, and has a unique business model.
Pros & Cons
- Part of Banking Group
- Parent Most likely Rated
- Parent Most likely Systemically Important
- Parent Likely on Stock Exchange
- Most Likely Cheap
- May Enable Local Tax Reporting
- May Not Be Fully Digital
- May Not Be Sophisticated
Suitability
Suitable
PART OF BANKING GROUP, CHEAP
VERY Suitable
Usually Cheap AND VERSATILE
Potentially Suitable
may lack sophisticated products
2. Independent Brokers (Pure Players)
Now, let’s have a look at the right side of our graph.
Brokers in this group are focused on the Brokerage Business. They are not part of a Systemically Important Banking Group. However, Tier 1 Brokers in this group may still be of significant importance in certain countries, and can even have banking licences but these are often non-core to their business.
3 Tiers of pure players
European Brokerage Landscape
Banks
Fintech
Platforms
2.1 Tier 1 Pure Play PLATFORMS
Interactive Brokers, Swissquote, SAXO, Hargreaves Lansdown etc.
These brokers are independent, may have banking licences, which plays in the favour in our assessment, but their core services are around the brokerage business, so the revenue stream is not diversified. What makes them unique is that they:
- May Cater to Institutionals – The sophistications of some of them makes them a credible counterparty to institutional investors like hedge funds. Also, brokers in this category like IBKR or SAXO often act as gateway to exchanges for Tier 2 Brokers or provide trading infrastructure to private banks or financial advisors.
- Are Industry Leaders – In at least one key developed market. Brokers in this group are usually competitive for long term investors, although prices in this category vary significantly – check before investing.
- Are Significant & More Transparent – Brokers are often classified as a significantly important institution by regulators – which attracts more oversight – or/and have millions of customers, which are often High Net Worth. They are usually rated by a rating agency, or/and listed on a Stock Exchange. Average client balances are typically high.
Examples include Interactive Brokers (International), Swissquote (International), SAXO (International), Hargreaves Lansdown (UK) or AJ Bell (UK).
Pros & Cons
- Can be very sophisticated
- May Have Banking Licence
- Possibly Rated or/and Listed
- Possibly significant importance
- Most Likely Very Competitive
- Some May Enable Local Tax Reporting
- Some May Not Be Fully Digital
- Business Concentration Risk
- May be complex
Suitability
USUALLY Suitable
COMPREHENSIVE but may be complex
Suitable
Established, VERSATILE
VERY Suitable
very sophisticated BUT CHECK PRICES
2.2 NEOBROKERS (Tier 2 Pure Players)
DEGIRO, Trading 212, Scalable Capital, Trade Republic, Lightyear etc.
Brokers in this category include established brokers that are not the most sophisticated players in their market and neobrokers. Safety and transparency vary widely across this group. The leaders in this category – like DEGIRO – may have a banking licence, and are listed, but some are less transparent, VC-funded and are yet to prove to be consistently profitable. In that respect, the compensation schemes in case of bankruptcy become even more important than e.g. for tightly regulated banks.
To overcome e.g. the ban on PFOF, they started expanding into banking activities, but they are not backed by an established banking group. Some like Scalable or Trade Republic also launched single market maker echanges that may include higher trading costs that are more opaque for investors to undertstand.
But, they have a few characteristics making them attractive for beginners:
- Very Cheap – Most of them offer zero-commission ETFs (check spreads though) and are overall very cheap for small trades. They lead all categories in that respect.
- Industry-leading Platforms – Their platforms and mobile apps are leading in terms of usability and interface design, high-level reporting and account opening process.
- International Presence – While Banking Brokers and some Tier 1 Pure Players may be local, Tier 2 players are usually present in most EU countries, and the UK.
- Tax Reporting – Often local tax reporting is included.
Examples include DEGIRO, Trading212 Scalable Capital, Trade Republic, Lightyear.
Pros & Cons
- Top Notch Mobile Platforms
- User-Friendly
- International Presence
- Very Competitive Prices
- Often Automated Tax Reporting
- Some May Enable Local Tax Reporting
- Some May Not Be Fully Digital
- Evolving Business Models
- Some have hidden costs (SMM Exchanges)
- Usually Not Significant Institution
Suitability
Suitable
CHeap, intuitive but may need broker diversification
Suitable
Cheap, but needs diversification for medium & large portfolios
Potentially Suitable
not sophisticated, can only be a side-broker for Larger portfolios
2.3 SPECULATIVE PLATFORMS (Tier 3 Brokers)
eToro, Plus 500 etc.
Brokers falling under this umbrella don’t resonate with our ethos. These platforms are for emotionally-driven investors. Platform’s business model is designed to extract value from these behavioral biases.
They usually have a:
- Speculative Business – As part of their core offering, including CFDs and Crypto products. This also includes aggressive ads that are at the opposite of evidence-based investing.
- Lack of Core ETFs – Long Term Investors won’t find key UCITS ETFs.
- Opaque Pricing – Brokers are responsible for setting the price of their instruments and products. Prices will be different from the prices provided by other brokers and the market levels, as well as the current prices on other exchanges or platforms.
- Weaker Regulator – may be overseen by Tier 2 regulators with potentially lower expertise and/or and have a history of regulatory fines.
The silver lining? These brokers have only room to become better – or fold!
Pros & Cons
- May Be Listed On Exchange In The Future
- May Give Access To Esoteric Products
- May Be Digital
- Risky Business Model
- Not Significant Institution
- Expensive
- Lack of ETF Offering
- Money-Losing Strategies at Core of Business Model
Suitability
UNSuitable
Promotes wrong values, Limited offering
UNSuitable
Risky business model, expensive, limited offering
UNSuitable
Risky business model, expensive, limited offering
🤔 Behind-the-scenes Insight – As we are exploring this industry, we found that the reason these brokers are promoted by other – often conflicted – websites, is most likely that they offer the highest commissions (also known as affiliate fees) for new customer sign-ups (sometimes as much as 10x the commissions offered by Tier 2 platforms). We have no doubts why that’s the case.
⚠️ At Bankeronwheels.com, we steer clear of these brokers.
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☕ Every Saturday morning with your coffee, enjoy FREE:
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📩 Bonus: FREE Portfolio Checklist! Sign up today and receive a FREE 2-page checklist to:
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WHat else you need to consider
While these are the broad Broker categories, your requirements may be unique.
Let’s have a look at all criteria in more detail, so that you can make your choice. In the next article, let’s look at safety considerations.
Good Luck and Keep’em* Rolling!
(* Wheels & Dividends)