Singapore Investors who are looking to open a brokerage account will find a wide variety of choices. In this article, we run you through the main things you should be looking at when picking a brokerage:
- Price
- Reliability
- Access to Research
- Platform Ease of Use
CDP and Custodian Explained
There are two main routes to share ownership for Singapore stocks specifically – the Custodian System and holding them in your CDP (Central Depository).
Essentially with a CDP system, the shares go into your CDP account and you are the legal ownership of the shares.
You get to attend AGMS, will receive Annual Reports & Circulars and If you are a top 20 Shareholder, your name will appear under the top 20 shareholder list.
With a custodian account, the brokerage is the legal owner of the shares and they hold it on trust for you.
You will still get your dividends but attending AGMs and other corporate actions are generally more troublesome as your custodian will have to liaise with you. It is still doable but just be prepared for the hassle involve.
You might be wondering why you would want to own your shares through a custodian account. The simple answer is that these types of accounts normally have lower commission costs which translates to direct cost savings to you.
Using Prefunded Accounts Will Be Cheaper
One direct way to save costs will be to use a Prefunded Account. Prefunded accounts or cash upfront accounts typically have lower commission rates as you need to have the cash in your accounts before you place an order.
Your stocks are also kept in custody with the brokerage instead of being in the CDP (i.e. custodian account)
DBS Cash Upfront Account is charging a commission rate of 0.12% with a $10 minimum for each trade. Likewise, UOB Kay Hian is also offering their UTRADE Plus Account to trade SGX market with cash upfront at 0.12% commission with S$10 minimum commission.
Maybank Kim Eng is currently doing a promotion till the 31st December 2019 with commission rates for 3 markets (Singapore, U.S. and Hong Kong/Shanghai-Hong Kong) all reduced to 0.12% which pretty low minimum commissions. You can check it out here.
Source: Maybank Kim Eng
My Personal Preferences:
For local shares, our pick goes towards DBS Bank with their Cash Upfront Account.
For overseas shares, our pick goes towards using Interactive Brokers given their low brokerage commissions. Furthermore, their forex conversion costs are unbeatable compared to other platforms.
Pricing for Brokerages:
Brokerage commissions have generally fallen across the board and have become very competitive that can range from 0.12 to 0.2% for SGX listed shares and 0.08% to 0.3% for shares listed overseas.
Different brokerages often have different rates for different markets too.
Investors that are starting out with a smaller quantum of money will find that they are often caught by the minimum commissions.
Generally you want to keep your cost per transaction to 1% of the order size with smaller amounts so you have to vary it according to your portfolio size.
It may be tempting to just look at brokerage costs but there are often other costs involved too that need to be taken into account for.
The challenge with local brokerages is that they generally charge a myriad of fees when it comes to buying foreign shares such as custodian charges and service fees for handling corporate transactions.
Some brokerages also charge annual fees as a percentage of your assets so it will depend significantly on your own circumstances.
Another area whereby brokerages will differ greatly is the spread they charge on their forex conversions which can add up to a hefty amount if you invest internationally.
In this regard, Interactive Brokers shines as they offer spreads that are very close to the spot rates. However, their platforms are notoriously complicated to use and may not be your cup of tea (see sections on Ease of Use).
Reliability for Brokerages
While pricing is important, the reliability and reputation of the broker is as important.
US-Brokers tend to offer cheaper market access especially to the US markets. However there is always a risk that these brokerages will close shop if their regional expansions are not successful as was the case with Charles Schwab which closed their Singapore office in 2019.
While your assets are safe, there will inevitably be a lot of trouble and hassle involved in transferring your assets out and in that regard, we generally prefer a local brokerage if the prices do not differ significantly.
Access to Research
Brokerage reports are generally useful for retail investors who do not have time to do fundamental market research. They can useful for summarizing market valuations, providing summarized financial ratios and providing insights into significant corporate transactions that are taking place.
The quality of research will differ from broker to broker. Generally we find that larger brokerage houses have higher quality research. The ones that stand out to us include DBS Vickers, UOB Kay-Hian and May Bank Kim Eng for local research.
You can check out our article here on How to Use Analyst Reports When Researching Companies [Coming Soon].
Platform Ease of Use
This is the most subjective of the three criteria and is going to depend heavily on your own preferences.
First off, you need to decide whether you want a broker you can speak to on the phone (even if you place most of your trades online). Secondly, you need to get comfortable with each platform’s complexity and U/X design.
For example, Interactive Brokers which is one of the cheapest brokerages for international stocks and forex conversions has a notoriously complicate platform. Most of the customer support is done via chat/email which can be frustrating if you are used to talking to someone on the phone.
I highly recommend testing a few brokerages to see which one you like most.
Fees not everything
There is going to be a point of diminishing return in chasing cost savings from lower brokerage commissions especially if you are a long term investor and trade infrequently.
The hassle of moving brokerages means that in reality you are unlikely to shift brokerages frequently.
As long as you pick a reputable brokerage with a fair fee structure and do not trade frequently, the small differences in brokerage fees are unlikely to have a huge impact on your returns.