Choose the right way to hold your shares

It found that pooled nominee accounts are the default method of holding shares offered to private investors by brokers. But despite their pervasiveness, many investors don't know what rights they have within these accounts or that there are alternative ways of holding shares.

There are three main ways you can hold shares in companies.

■ Certificated: you hold a paper share certificate as evidence of legal title to the shares and your name is recorded on the company share register. You receive all dividends and shareholder rights directly, including the right to attend and vote at annual general meetings (AGMs) and extraordinary general meetings (EGMs); receive company accounts and annual reports, and any shareholder perks such as discounts on products sold by the company. You can 'dematerialise' or move a certificated holding into a digital format (ie, a personal Crest or nominee account), and you can also move digital holdings into certificated shares, although there are often charges for doing so.

■ Personal Crest account: your name is recorded on the company share register and in digital form within the Crest system (the electronic settlement service). You receive all dividends and shareholder rights directly.

■ Nominee account: your stockbroker is listed as the legal owner of the shares on the company share register, and receives the dividends and shareholder rights attached to the shares directly. They then pass on dividends to you, the underlying investor, who is recognised as the "beneficial owner" of the shares. Nominee accounts can either be pooled, in which case the broker lumps the shares of a number of clients into a single client account, and keeps records of who owns what and what dividends are due to whom; or designated, in which your assets are held separately from other clients in an individual account.

As the BIS report stated, the knock-on effect of the nominee model is that investors may believe they are the owner of their shares but in fact they are dependent on their broker to facilitate access to their shareholder rights. Not all brokers do this and some reserve the right to charge for passing on these rights.

BIS concluded that the lack of awareness among investors about different shareholding options means brokers have little incentive to explain or promote different types of models.

Shareholder societies have seized on the report as evidence of what they view as the unfairness of the nominee model compared with the registered shareholder system, which personal Crest members and certificated trades enjoy. The UK Individual Shareholders Society (ShareSoc) said the report showed "the need for reform".

Roger Lawson, deputy chairman of ShareSoc, says brokers have an incentive to keep investors ignorant of alternatives to the pooled nominee account system as it is in their commercial interest to do so.

"Stockbrokers are really keen on nominee accounts because if you're on the share register the dividends go directly to you, but if you're in the nominee account, they go into the nominee account and typically they stay and the broker gets interest on them," he says.

"People keep a large amount of cash in their stockbroker's account typically. The other big commercial reason they have is locking the clients in and making it difficult for them to move elsewhere."

However, the report also says that most brokers believe their clients are happy with nominee accounts because they are cheaper to run than other types of accounts, and the reduced administration cost can be passed on to private investors. Furthermore, brokers reported that the number of investors who request their shareholder rights be passed back to them is low, suggesting most investors are not particularly interested in accessing their rights.

But Mr Lawson believes the low take-up is due to a lack of investor awareness not demand. "The problem is that they don't know what they're missing because stockbrokers aren't telling them that they're losing the rights to vote and have a say in the way the companies they're investing in are run," he says. "And they're also losing the right to receive information or attend an AGM, and they don't know this.

The industry body that represents stockbrokers and investment firms, the Wealth Management Association (WMA), also wants to see change. Last year it called for the government to mandate for shareholders within nominee accounts to be able to opt in to receive the same rights as registered shareholders.

"The argument that investors don't want this so why do we need to offer it is, I think, a little bit out of date now," says Andy Thompson, director of operational policy and research at the WMA. "The argument that very few want the right to vote or attend AGMs may well be true and, if that is the case, it's not going to be a huge burden on investment firms. If there are clients that want it, an investment firm has to provide it."

However, the WMA doesn't want to see the government pass a blanket mandate that would give all shareholders trading within nominee accounts the same rights as registered shareholders. It says it should be the choice of the individual shareholder as to whether they receive information, attendance and voting rights, as this would help ensure that costs are kept to a minimum.

Unlike ShareSoc, the WMA is not more in favour of personal Crest accounts than nominee accounts. It sees the opt-in as a way of making nominee accounts more attractive to investors.

Mr Thompson acknowledges the advantages of personal Crest membership, but points out that Crest take-up has been low. The BIS report found that there are around 20,000 sponsored Crest accounts, which is equivalent to less than 1 per cent of the total number of private shareholders.

Nevertheless, the fact that the number of brokers offering Crest has been declining means that investors have less choice if they want to go for personal Crest membership. Last month Fidelity became the latest provider to stop offering Crest.

A stockbroker that offers a range of different shareholding options is Redmayne-Bentley. Clients are able to trade certificated shares, as well as within a personal Crest account and a nominee account. Unusually, the company places clients into designated nominee accounts as standard, rather than the industry-wide practice of placing clients into pooled nominee accounts.

Tim Archer, head of operations at Redmayne-Bentley, says using designated nominee accounts has always been the broker's policy but the firm believes in providing different options to clients to meet a variety of different concerns.

"There are a number of clients out there who want the flexibility of electronic holdings but also want to have the comfort of having their shares in their own name," he says. "By having Crest it allows us to provide both. For some people, it will come down to cost while some will talk about comfort. We do operate on a pooled basis in some of our assets - we're not against pooled nominee accounts."

The shareholding option that's right for you

Below we've listed the pros and cons attached to each different shareholding option to make it easier for you to weigh up what suits your personal concerns.

Source: Investors Chronicle