This post is part of a series: How do I start investing in index funds? Israel edition. Read the posts in order here:
- Part I: Introduction
- Part II: Assets, Securities and Funds
- Part III: Brokerages – this post
- Part IV: Tax Considerations
Remember the supermarket analogy from the introductory article? Once you’ve thought about what funds you want to buy, you need to pick the supermarket at which you buy them – and an investments supermarket is called a brokerage. It might also be called an investment platform, and in Israel another name is בית השקעות Bet Hashka’ot – Investment House (you’ll also see just ‘ברוקראז). Providers of brokerage services are usually also members of the stock exchange (חברי בורסה) allowing them to execute trades on your behalf. For overseas stock exchanges, they usually have contracts with brokerages in other countries allowing them to execute trades by proxy on e.g. the NYSE.
So who are the brokerages in Israel? There are the banks: you can trade through your bank’s trading platform. But their fees are typically higher than the חש”בים (acronym for חברי בורסה שאינם בנקים) – non-bank brokerage firms: a number of competitors including Meitav Dash, Psagot, IBI and Excellence. All of these are regulated by the Israel Securities Authority or the Bank of Israel. In addition to these, you could invest through a foreign brokerage that explicitly provides services in Israel, although the question of who’s regulating them can start to get quite complicated (for this reason I’m not giving any examples). Lastly, you could invest through a totally foreign brokerage, such as your bank in your country of origin. In that case you’d need to think about how you’d transfer your money over there, of course.
So far, I’ve assumed a kind-of “two-layered” approach to investing: choose a broker, and choose investments through that broker. But there is also a “one-layered” approach to investing, where the broker that you give your money to also manages the investment itself for you. These are the מוסדיים Mosdi’im – the institutional investors*. This adds to the list of brokerages the insurance companies, such as Clal, Harel and Menora Mivtachim. You’ll find this approach most frequently in Karnot Hishtalmut and pension funds: for example, if you want to open up a Kupat Gemel LeHashka’a that tracks the S&P 500 index (more on this in the tax considerations article), you could give your money straight to Intergemel and they would manage the (passive) investment for you. In these cases, bear in mind that there will usually be two separate fees:
- דמי ניהול Dme Nihul – “management fee”; and
- הוצאות ניהול השקעות Hotsa’ot Nihul Hashka’ot – portfolio management expenses.
These fees essentially reflect the two layers of services that they’re providing; they are equivalent respectively to the brokerage fee and the fund manager fee.
Choosing a brokerage
The main considerations involved when choosing a brokerage in isolation, ignoring tax considerations, are reputability, fees and other services. Here are some of the things you’ll need to consider:
- Which stock exchanges do they allow you to trade on, and which instruments do they support? Can you buy bonds / mutual funds / ETFs / individual shares through them?
- Fees for:
- “ק/מ” buying and selling each instrument that you’re planning to trade
- Fixed monthly fees (Dme Nihul) for holding an account (typically 20 shekels a month at Israeli brokers); also Dme Mishmeret (an extra fee charged mainly by the banks)
- Converting money between currencies
- Transferring investment holdings directly to another brokerage (without actually selling & buying the holdings)
- Transferring money to / from your bank
- Reinvesting dividends
- Do they give tax reports and/or do tax deduction at source? This may make your life easier or harder depending on your tax situation.
- Do they have a minimum to open an account?
- Which trading platform do they use? There are a wide range, from very basic to very sophisticated. Often one brokerage will offer several options.
- Who regulates them? How can you be sure your money is safe in the event that something goes wrong (e.g. company goes bankrupt, fraud)?
- What technical support do they offer?
As you can see, brokerages offer a range of services (access to multiple stock markets, currency conversion, tax deduction at source) beyond just the basic service of giving you access to capital markets. In choosing a broker, you need to decide which services are important to you and do a cost/benefit analysis.
Is there a minimum to start investing?
As mentioned above, some of the brokerages set a minimum initial deposit to open an account – sometimes 20,000 shekels, sometimes 50,000 shekels, sometimes other. But some of them set no minimum, so theoretically, you can start investing from the very first shekel! However, there is also an effective minimum.
We need to think about fixed costs and marginal costs. Marginal costs include the annual fund manager fee (charged e.g. by Vanguard if you have an ETF with them), currency exchange fees, buying/selling fees – these fees are larger in proportion to the size of your investment. But there are also fixed costs: the monthly brokerage account fee, the minimum charge for buying/selling (could be anything from $0 – $20 depending on the broker), and others. If you’re only investing 100 shekels, it’s not going to be worth paying 240 shekels a year to hold an account, as no investment return will exceed that. On the other hand, if you’re investing 80,000 shekels, then 240 shekels a year is just 0.3% of the investment – not such a disastrous load. There’s no clear borderline but I’d aim to ensure as a rule of thumb that the annual brokerage fees don’t come to more than 0.5% of the investment.
On the other hand, if the broker charges a fixed percentage of your holding instead of flat fees (particularly common in the “one-layered” approach mentioned above), then you can start investing from the first shekel. So percentage fees are better for smaller investments, and flat fees are better for larger investments. Make sure to take into account all the fees.
In the next article I’ll discuss a selection of tax considerations that might be worth taking into account when deciding how to invest.
Tabular comparison of some non-bank brokerages in Israel (Hebrew): https://www.hasolidit.com/השוואת-בתי-השקעות-למסחר-עצמאי-בבורסה
Official comparison of the fees charged by all members of the Tel Aviv Stock Exchange (Hebrew): https://www.tase.co.il/he/market_data/trading_fees
*Mosdi’im include any institution that manages a fund, so include also the active and passive fund managers such as Psagot. Most of the brokerages and banks also offer investment services so basically all the companies mentioned here are institutional investors. Vanguard is also an institutional investor, although not Israeli.