Rip-off Britain. Nowhere is this statement more true than in the world of finance and investing. We as the public are getting fleeced by the stock-broking world. The average price we pay per deal is £10 which is crazy. For a buy and hold investor like me who only makes about 15 trades a year, dealing fees add up to £150 per annum. And considering I have a good 40 years of being an investor ahead of me, total dealing fees balloon to £6,000. And if you think that is bad, have a look at this. If all I did was put the £150 a year spent on fees in a plain vanilla index fund earning the historical average of 8% per annum, I would end up with a whopping £41,967! Fees are really a detriment to financial success.
So when I heard Freetrade were introducing the UK’s first fee free stock brokerage platform, I was ecstatic. It was essentially like getting £41,967 for free! So I have got in touch with the good people at Freetrade to find out more about the UKs cheapest share dealing platform. Below is my write-up on what I have gathered so far about the new platform.
What Is Freetrade?
Freetrade is a new online share dealing platform that will allow users to execute trades with zero dealing costs. It’s aim is to revolutionise the stockbroking industry and make it easier for everyday people to buy and sell shares.
How Does Freetrade Work?
With Freetrade executing trades for free via the basic dealing service, the trades will be conducted in bulk at a given time of the day in order to keep the costs down.
For example, if I want to buy shares in BP at the market rate, I would place a (market) buy order and this trade would execute at a specific point in the day when Freetrade is buying BP shares for all other account holders.
Likewise, if I wanted to sell shares in BP, it would be done at some specific point in the day.
For those that execute trades via limit orders, Freetrade will have this function as well. In this case, a share trade will execute if the market price equals the limit price you set.
The bulk order process is nothing new and is a practice many other reputable investment firms do, including Vanguard and Stockpile.
(Users will also have the option to pay for live execution, which will be a very small flat fee.)
What Accounts Do Freetrade have? Do They Offer Tax Sheltered Accounts?
Freetrade will have three different account types:
- Basic Account: The basic account will be free forever with no account minimums. The basic account is akin to a share dealing account you see at most other brokerage platforms but without the fees.
- ISA Account: The ISA is a way for investors to grow their money completely tax free – no tax on dividends and no tax on capital gains. The charge for an ISA account is £3 per month. Again dealing in this account will be completely free.
- SIPP Account: A SIPP (Pension) account will be rolled out after the basic and ISA accounts.
What Markets and Assets Can You Trade in Via Freetrade?
Freetrade will have the most popular stocks and ETFs on major UK and US exchanges. The platform will also enable users to purchase American Depositary Receipts (ADRs) listed on the US markets, meaning users we’ll be able to trade a number of European and Asian companies, too.
Freetrade’s plan is to start with an an optimised number of available securities, and they will enhance the offering based on user feedback and data, similar to how Robinhood started off. I as a registered member of the invite list recently received an email asking if I plan to invest in Chinese companies with Freetrade? It is great to see a company asking for my opinion and tailoring its offering for its users needs!
When Will Freetrade be launching?
Freetrade is expected to launch at the end of this year or beginning of next year.
The exact dates cannot be given at this time as the company is still waiting for authorisation from the FCA. The application with the FCA relates to Freetrade becoming a directly authorised stockbroker. This means that should authorisation come through, Freetrade will have direct relationship with the users , with no layers of intermediation between them. This in turn will keep brokerage cost low which benefits people like me and you.
When Freetrade launches, it will initially be via a private invite-only roll out. So if you want to be one of the first users of the product, head over to the Freetrade site and register your email address!
One more point to add is that the initial launch will be for iOS only (Apple iPhones). The Freetrade app will come to Android after this with expectations of launch in early 2018.
What Should Interested Members Do In the Meantime
As Freetrade are taking waiting list approach, the best thing to do is to go and register your interest at Freetrade’s website by simply entering your email address. If you want to jump the wait list and be one of the first people to get the app, start sending out invites for people to join. The more people you invite, the higher up the queue you go.
Advantages of using Freetrade.
There are a number of advantages we feel strongly about, the highlights are:
- The biggest advantage is free dealing offering. Not having to pay commission for buying or selling shares will save a lot of money and enhance returns as seen by my opening paragraph.
- The product is a mobile app that makes investing natural and accessible. Current solutions in the UK feel bloated, unusable and business-minded. From what I understand, Freetrade are building something that feels clean, crisp and like a tech company.
- Building a diversified portfolio with small amounts. I personally know many people who want a diversified portfolio but don’t have the sufficient funds at present to make the numerous purchases required worthwhile. Freetrade will be ideal for people in this situation as there are no trading fees, no minimums and provides the opportunity to trade in fractional shares. Younger more cash-strapped investors will be particular beneficiaries on this point.
What is investing in Fractional Shares?
A fractional share is any amount less than one whole share, such as 0.50 or 3.20 shares. At first glance fractional shares might sound silly as who would want to own half a share right. But being able to buy fractional shares gives you as an investor two big advantages:
- Be able to gain an ownership stake in companies that have a high price per share. For example, one company that I have always wanted to buy due to its strong cash flows, high returns on capital and favourable growth rates is Lindt and Sprungli, the maker of Lindt and other branded chocolates. The problem is, the price per share of Lindt’s on the Swiss exchange is CHF 67,410 and the ADR is $5,600. This is way too high for a small investor like me. Thus, fractional shares allows me to buy 0.10 ADR shares for $560 thus giving me as a small investor the same opportunity a larger investor has in owning a stake in this wonderful business.
- Be able to put cash to work immediately. One of the stocks in my portfolio I would like to re-invest my dividends in s Coca Cola. The problem is the shares trade for $46 but I only currently receive $30 in annual income from this stock. I thus have to wait two years before I can reinvest dividends to buy additional shares. Fractional shares eliminates this problem as I can use the quarterly dividend I receive of $7.5 to buy 0.16 shares in Coca Cola and thus put my money to work immediately and benefit from a longer period of compounding.
For those readers that want more technical details regarding fractional shares e.g. who owns the full share, etc. I suggest you read this Drivewealth article.
Are stocks held in a ring fenced custody account and away from short sellers?
Upon being authorised as a stockbroker, a ring-fenced nominee account will hold the shares on behalf of individual investors. No lending out to short sellers.
Personally for me, this is a big point. I see too many brokerage houses lending shares to short sellers and this is to the detriment of small investors like you and I. To understand why have a read of this Business Insider article.
How safe is Freetrade i.e. is it FCA registered?
Freetrade Ltd is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the FCA.
As mentioned above, Freetrade have applied to be a directly authorised stockbroker with the FCA: https://blog.freetrade.io/why-we-are-becoming-a-directly-authorised-stockbroker-490defa38f59
Any there any ‘hidden’ fees? For example some low cost brokers have a dividend processing and exchange connection fees for foreign markets (I am looking at you Degiro!)
The people at Freetrade are staunch on the point that they are no hidden fees as they want to be as transparent as possible. The platform will not have dividend processing fees or anything similar or exchange connection fees.
This is the further remarks I have received:
“Hidden fees go against our mission at Freetrade. We want you to have a comprehensive understanding of your costs, so you can make the right trading decisions.”
My Thoughts So Far
From what I have seen so far Freetrade seems like a welcome disruption to the online stock broking world. The real test from my perspective will be to see if Freetrade is able to deliver on what’s promised – low costs with a high user experience. I will be writing a review on Freetrade once it is launched so be sure to check back. In the meantime, I have signed up to the waiting list and have been inviting friends using the code provided in order to get bumped up the queue and be one of the first users of the app.