How to Become a Stockbroker in the UK
The first thing to consider when looking at becoming a broker is that the role of a traditional stockbroker is almost dead. Low cost online trading sites and cheap ‘execution only’ services dominate the traditional stock broking arena and leave little margin for broking firms to make money.
More diverse instruments have cropped up over the years such as ‘Contracts For Difference’ (CFDs), spread trading and other ‘derivative’ instruments. So becoming a ‘stockbroker’ is a little outdated, these days you are looking at becoming an ‘advisory broker’ or a ‘trader’.
The difference between the two is wide. An advisory broker is typically someone who works within a firm and relies heavily on the recommendations of the research department in that firm and, generally, ‘sells’ those trades to clients. This may seem a cynical description of the job role but is not meant as such. Regulations within the financial service industry are heavy and investor protections fierce so each and every trade needs to be justified in order to pass regulatory scrutiny. To a certain extent this ties the hands of any advisory broker.
These days, however, many research departments are extremely professionally run and create trading ideas for brokers and their clients that are well thought out and justifiable. As a start in the broking world this is a great step. It gives you a grounding in the markets, you begin to understand why recommendations are being made and, along with training from the firm you work for, can be an excellent introduction to the world of broking.
Later in your experience of advisory broking you will be able to make recommendations of your own as you become more adept at spotting opportunities in the market and, as your success grows, you will be given more autonomy in your recommendations.
As a ‘trader’ you are more in the deep end. A typical trader will be focused, initially, on one particular marke e.g an equities trader. The firm you work with will have an extensive trading program and you will spend time as a ‘trading assistant’ to an experienced trader. After this period, and when your employer feels you are ready, you will be given limited trading funds of the banks own cash.
This is what is known as a ‘Proprietary Trader’ or ‘Prop Trader’. Basically you are trading the firms own money in order to make profits for your employer. As you become, hopefully, more successful your trading limits will be increased, you may also be allowed to trade other instruments in order to make more sophisticated trades and, if your are profitable, your bonuses will increase.
The traditional Prop Trader will be working on the floor of a bank or trading house, however, ‘prop traders’ work in hedge funds and pension funds trading clients funds that have been deposited with the employer.
Another area of trading is ‘discretionary trading’. This is typically where an experienced trader is responsible for trading the accounts of individual clients rather than a fund or employer’s funds.
This is an extremely interesting area of trading for those who enjoy the human element as well as trading. A discretionary trader will be responsible for a number of accounts which are traded individually. Many traders create relationships with a client base that have the same risk profile which enables them to trade on an ‘omnibus’ basis.
‘Omnibus’ accounts are, essentially, a number of accounts traded in the same manner across all accounts. This enables the trader to make trading decisions that are then executed across the accounts in proportion to the size of each account. For example, let’s say you are a trader and are looking to trade Google shares. You would make a 100,000 purchase of Google shares and execute these across the accounts allocating 5% of each account to the trade.
So this is a brief run-down of the types of broking jobs out there, so how do you get in?
Typically, you get into a prop traders job, these days, by having the necessary qualifications. A maths, economics and more frequently now, a physics degree will get you an interview. However, just smarts will not get you the job. Most successful traders have the ‘X-factor’, an ability to be confident in their own decisions and a track record of such. Involvement in after hours activities such as debating, sports and, of course, finance related activities will be a plus.
Taking qualifications off your own back, such as Securities Institute exams won’t hurt and shows commitment.
Getting into advisory roles is probably easier than a prop trading role. Many firms are looking for good sales people to market the services of companies and will train you up on the technical and broking side of things but existing SI qualifications will give you a head start as no firm really wants to spend six months paying you and training you on the required FSA exams, although if you are a good candidate they will.
If you have no particular qualifications then you will have to start off at the bottom. You should research companies that are in the smaller company market and make enquiries; most do not advertise jobs but are always looking for good candidates. Turnover is high so new recruits are always required. You will be better received (and will probably get an interview) if you have taken the SI exams before you apply, or can demonstrate that you are studying for them.
In the interview for such a job, you will be asked your sales experience, you may even be put on the spot to sell something. (In my first interview I was asked to sell a cup on the desk to the interviewer!)
It is also important to know that the environments in dealing rooms are traditional male, and harsh. If you are a sensitive soul a trading floor may not be the place for you as you will be expected to give as good as you get. With all the rules these days on how to conduct yourself at work it is not as harsh as it used to be, but it is still a pressured environment.
What can you expect to earn? As a prop trader you will probably be started on a salary of around £30,000 + if you have the right qualifications. It very much depends on who you are working for. A first tier bank or trading firm will pay higher than this.
You should expect (if the company is making profits) to get at least 50% of your salary as a bonus. As you progress and your trading prowess becomes better your salary can increase exponentially, million pound salaries and bonuses are common place for the best traders.
As an advisory broker, without the necessary qualifications you will probably earn £20,000 per annum plus commissions. Typically someone who approaches the job correctly and works hard could expect to be making £50,000 in their first year and £100,000 + thereafter.
As a discretionary account trader you will probably be on £30,000 plus a share of profits related to how much money the firm is making. Typically a discretionary trader will be managing 100 – 200 clients after 2 years. With an average of £50,000 per account that is £5mn – £10mn. Annual management charges to the company will be about 1%, so that is £50,000 – £100,000 which, essentially, covers your salary. A performance fee of 10%-20% is charged on the profits of the accounts, making this (at 10% performance) around £50,000 – £100,000 per annum. You would expect to get 25% of this.
Of course if your performance is higher, or your average client account size is more, you earnings will increase on that basis.
What if you are not so good?
Unfortunately the broking industry does not really care if you are a ‘nice person’ these businesses are based on performance and you will find that you will be unceremoniously dumped if you do not perform consistently.
The industry is also very cyclical and in times of a poor market or low profits, banks and trading house will cut back staff rapidly and you may find yourself looking for a job.
The good news, however, is that if you are dedicated and good at your job you will be able to apply for ever increasingly lucrative jobs in trading, management and fund management which can produce astronomical levels of pay.
I wish you all the best in your trading endeavors and would recommend that you download an online trading system in demo format to see if you have what it takes, or even to trade your own money and begin learning what is, to me, the best job in the world… apart from driving a Formula One car for Ferrari… but that is a whole new article…