Choosing a broker is an important step when starting to invest. There are many different options available, so picking the right one for you is challenging. We take a closer look at Interactive Broker, a US-based broker. We'll look at the pros and cons, the fees, convenience of setting up an account and safety. By the end, you'll be able to decide if Interactive Brokers is a right broker for you to invest your savings, or if another broker suits you better.
Pros and cons of Interactive Brokers
The story of Interactive Brokers
Interactive Brokers is an American brokerage firm established in 1978 by Thomas Peterffy, who still serves as its chairman. It's grown to be one of the largest in the world with over 2 million customers.
It employs just under 3,000 staff across 15 countries, and is publicly traded on the stock exchange under the ticker symbol IBKR. The brokerage offers a comprehensive trading platform, providing investors access to a diverse range of financial instruments across 150 exchanges in 33 countries.
Interactive Brokers is renowned for its low transaction costs, making it one of the cheapest options out there but let's take a look at their offer in more detail.
It's free to create an account. Also, there's no membership fee. So in most cases, you'll only pay a transaction fee for whenever you buy or sell something.
Unfortunately, it's quite difficult to fully comprehend Interactive Brokers' fee structure. They have two fee systems, which is quite unique for the brokerage space, and you have to choose which system to use. The price further depends on the stock market you're trading on.
Interactive Brokers' fixed pricing is fairly straightforward. Let's say you buy an ETF on an Italian stock exchange. You'll pay a fee of 0.05% of the trade value, with a minimum of €3.00. This assumes the default smart routing method to route your trade. On top of that, you can choose a different routing method, which they call direct routing. But this option costs more.
The difference between direct routing and smart routing lies in the level of control and expertise required from you. If you want to control where your order is sent, direct routing might be the best option for you. If you prefer Interactive Brokers to automatically route your order in search of the best possible execution, then you might want to use smart routing.
The tiered pricing model is more complicated. You pay a lower percentage than with the fixed pricing, depending on the size of the trade. But on top of that, there are exchange, clearing and regulatory fees. These fees depend on the exchange you execute your trade on. You definitely need to get your calculator out for a clear idea of the total fee! In most cases it's easiest to stick with their fixed pricing. But it really depends on your use case so make sure you double-check.
Interactive Brokers have quite a standard fee structure for their fixed pricing which is based on a commission of each purchase:
However, note that as a European investor, you're only able to withdraw once every 30 days, otherwise you'll pay €1 per withdrawal if you use SEPA. The price is €8 for using a bank transfer.
Fees for ETFs
Interactive Brokers is one the cheapest broker on the market for European investors. For instance, it costs €3.00 to buy €1,000 of the iShares Core S&P 500 ETF (IE00B5BMR087).
Convenience of Interactive Brokers
Targeted for traders
They offer all sorts of options for trading and buying stocks. Considering it's been developed with traders in mind, it's no surprise that it's full of buttons and confusing sections. It's best you stick with the standard view if you're mostly buying ETFs or just a few individual stocks.
Automated savings plans
No. Interactive Brokers doesn't offer any saving plans or any type of automation for their customers. You'll have to manually send money towards your account to top it up and then make the trades.
A popular investment strategy is euro-cost averaging, where you invest periodically instead of investing large lump sums in one go. You invest at fixed times, for instance every month, regardless of how the markets are performing. Most people are paid monthly, so it makes sense for their investments to follow the same pattern. Fortunately Interactive Brokers offers fractional shares but you have to decide to opt-in on your account.
Interactive Brokers is not entirely tailored for the European market and you can tell this in their customer support. You have to call a Swiss phone number in order to speak to someone and ask questions. They aren't there to help with your local taxes and queries. However, their email help is pretty good. We asked some questions and got a prompt reply from them in a matter of a day!
🇮🇹 Declarative regime
As an Italian investor, you'll receive a yearly report from Interactive Brokers. You'll have to manually take that date and input it into your tax reports. You'll have to declare your income, capital gains as well as the IVAFE (wealth tax).
Note that you'll have to complete this manually as Interactive Brokers puts the burden on you as an investor and they have previously made errors in their tax reports.
🇧🇪 TOB ("beurstaks" / "taxe boursière")
There’s a tax on the transaction every time you buy or sell a security in Belgium. The rules concerning the tax rate are complicated, also for ETFs. Depending on the characteristics of the ETF, the transaction tax varies between 0.12% and 1.32%.
Unfortunately Interactive Brokers provide no support for this.
🇧🇪 Dividend tax
Interactive Brokers doesn't help you with the dividend tax. In Belgium, any dividend you perceive is taxed at 30%. Accumulating funds, which directly reinvest dividends, are a way around this tax. On the other hand, distributing funds distribute their dividends, which means they're taxable.
🇧🇪 Reynders Tax
For ETFs that consist of at least 10% bonds, there is a 30% tax on the profits made when selling. For example, if you bought a bond ETF at €100 and end up selling it later for €130, your net profit will only be €21. The other €9 will go to the Belgian state through this tax.
Unfortunately Interactive Brokers doesn't withhold this tax for you. You will have to calculate and declare it yourself.
🇧🇪 Does Interactive Brokers require declaring the account to the NBB?
Yes, as Interactive Brokers is a foreign account so you have to declare to the National Bank of Belgium as well as on your tax returns every year.
Setting up an account
Let's dig into the details of setting up your Interactive Brokers account for the first-time.
Time to open an account
Setting up an account through the app is possible, although it’s not very user friendly. You need to run through a series of questions concerning security, profile, education, experience, product knowledge, etc… which are easier to answer from a computer rather than on your mobile phone due to the complexity. The opening time of an account on Interactive Brokers is usually 3 business days. Note that you can also start an application and then complete it at a later stage which is a neat feature.
Create an account on the web and mobile
It's quite easy to register an account using Interactive Brokers. You fill in your details, upload your documents stating who you are and then you're account will be reviewed and checked. To open an account, you'll need your IBAN plus a copy of our passport or ID. The minimum deposit required is €2,000 but only if you intend to trade on margin or short-sell otherwise there are no minimums.
Ease of use: 2/5
As it's purely a trading app, Interactive Brokers shows too many details that aren't very relevant to most investors, especially for buy-and-hold index investors. This makes the mobile experience can get quite clunky and fairly difficult to find the information you need to make an investment decision. On the web version, there are far too many options for investors on the beginning of their journey. However, for the more knowledgable investors, the tools Interactive Brokers offers are really helpful to provide you the analysis you're seeking but it remains complicated for beginner investors. That's why we've rated it a 2 out of 5!
Children accounts and joint accounts
Yes, you're able to set up a joint account using Interactive Brokers. You can also create children accounts. In a custodial account, an adult (the custodian) manages the account on behalf of the child until they reach 18 years old.
Moving between countries is easy with Interactive Brokers
A big advantage of using Interactive Brokers is that you can move from one country to another without changing your account to a new entity. You simply have to reach out to them and they will make sure your account is correctly switched. In contrast and from our own personal experience, this is a complicated process for other brokers.
Is Interactive Brokers safe?
Considering Interactive Brokers is a company listed on the Nasdaq, it has to meet higher requirements and transparency than other brokers. This provides us with a sense of safety.
Who is the regulator?
As Interactive Brokers is at the core a US entity, it's regulated by the SEC. However, for it's European operations, it's a regulated entity in both Ireland and Hungary. Therefore it's under the supervision of these parties: the Central Bank of Ireland and Central Bank of Hungary.
Have they had any issues with the regulator?
Yes, Interactive Brokers has had some issues with the regulator. These issues are related to its anti-money laundering (AML) practices. The Securities and Exchange Commission (SEC) announced that Interactive Brokers would pay an $11.5 million penalty to settle charges of repeatedly failing to file Suspicious Activity Reports (SARs) for U.S. microcap securities trades. These SARs are required for transactions suspected of involving fraud or lacking a lawful business purpose. The SEC found that over a one-year period, Interactive Brokers failed to file more than 150 SARs, even when suspicious transactions were flagged by its compliance personnel.
In parallel actions, the Financial Industry Regulatory Authority (FINRA) and the Commodity Futures Trading Commission (CFTC) also announced settlements with Interactive Brokers for similar AML failures. FINRA fined the firm $15 million, while the CFTC fined them another $11.5 million, bringing the total penalties to $38 million. FINRA found that Interactive Brokers did not adequately monitor its customers' wire transfers for money laundering concerns, failed to investigate suspicious activities due to staffing and system inadequacies, and did not establish proper policies and controls for reporting suspicious transactions as required by the Bank Secrecy Act (BSA).
How much of your assets are protected by the investor protection scheme?
Interestingly enough, your assets with Interactive Brokers are protected by the Securities Investor Protection Corporation (SIPC). This means that in the event of bankruptcy, customers are protected for amounts up to $500,000. This is a lot more than the European investor protection scheme we get with European brokers.
Is your cash protected by the deposit guarantee scheme?
Your cash is protected for amounts up to $250,000 which is significantly more than the European bank deposit guarantee scheme.
Does Interactive Brokers do securities lending?
Interactive Brokers does participate in securities lending but you have to agree to join the "Stock Yield Enhancement Programme". If you own stocks that are in demand in the securities lending market, Interactive Brokers will borrow these stocks, deposit collateral into the client's account, and then lend the shares out. However, you have to opt-in for this service and you can find all the details on their website.
Does Interactive Brokers do payment for order flow?
No, They do not do payment for order flow (PFOF). It is an important source of revenue for many new brokers, including another German provider Trade Republic. This practice involves routing your orders to certain market makers, who then pay the broker for the right of executing these orders. PFOF can work at your detriment, as brokers may prioritise payment over executing the best possible trade for you.
We have also compared Interactive Brokers with other brokers if you want to dig deeper:
The easier way: Curvo
Brokers push you to trade and to pick individual companies to invest in. Rather than picking individual stocks such as Amazon or Tesla, index funds are a way to buy the whole market, across all sectors and regions of the world. Essentially, you own a small portion of thousands of companies throughout the world. Instead of betting on a particular company, you are placing a bet on the global economy.
Rather than having to pick the right stocks or ETFs among the thousands available through a broker like Interactive Brokers, you invest in a portfolio that is tailored to you and your goals. These portfolios are composed of globally diversified index funds, meaning you earn a piece of the growth of the global economy, and they're best suited to make the most of your savings long term. And they're secure, as they're managed by NNEK, a Dutch investment firm under supervision of the regulator in the Netherlands (AFM).
We believe that investing is an important tool for our generation to improve our financial well-being and to prepare for our future. We are building Curvo to fulfil that vision, by making good investing easy and accessible to all:
- Diversified portfolio set up for you: The best portfolio for you is built by NNEK based on your time horizon and financial goals. Simply answer a short questionnaire and you’ll get everything set up for you.
- Automated savings plans: Through Curvo’s app you can set up a monthly contribution from €50. That means that money is automatically invested for you in your portfolio. Put your savings on autopilot!
- Fractional shares: All the money you send towards your portfolio is fully invested by NNEK. No cash is left on the side.
- No TOB 🇧🇪 : Significant savings as the portfolios aren’t liable for the Belgian transaction tax (or "TOB"). This saves you between 0.12% and 1.32% for every time you buy or sell!
- Sustainable investments: Your investments focus on one guiding principle: don’t invest in companies that are considered destructive to the planet. This means that sectors like non-renewable energy, vice products, weapons and controversial companies are all excluded.
- Project yourself into the future: Through Curvo you can see how much your portfolio is expected to be worth in the future. You can answer questions like “how will increasing my monthly contribution by €50, €100 or €200 affect my long-term savings?” to give a concrete idea for the “future you”.
Learn more on how it compares to investing through a broker.
Interactive Brokers can be an overwhelming broker to use for first-time investors. It's better suited to more experienced traders as it has a variety of options and can get a bit confusing at first. It feels a bit daunting to a first-time investor. The pros of Interactive Brokers is that it handles fractional shares and is cheap. Unfortunately it doesn't help you with your taxes and this can be burdensome for first-time investors. Therefore we can't recommend it as a broker if you're just starting your journey in investing.
Questions you may have
Is Interactive Brokers good for beginners?
No, not really. It's best suited for experienced traders who can understand their way around the platform and all the buttons.
Is Interactive Brokers better than eToro?
Yes. It operates a far more transparent business model and has been around a lot longer. We suggest you look at our review of eToro to get a full run down of their platform and how it compares to other brokers.
Is Interactive Brokers trustworthy?
Yes. It's a publicly listed company and has been around a long-time as an online broker with over 2m users around the world.
What's the best broker for a beginner?
We think DEGIRO (Germany) and Bolero (Belgium) are two of the best brokers for beginning investors. Using a broker makes sense if you have the motivation, interest and time to go through the learning curve of managing your own investments. If not, we built Curvo as the most beginner-friendly way for good investing in Belgium. Discover if Curvo suits your needs.