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How to choose a stockbroker

Created:
17 August 2006

The stockbroking and wealth-management market is becoming ever more complex and diversified, which doesn't make things easy when you're trying to choose a stockbroker. The 'best buys' section on page iii highlights some of this year's cheapest deals, but it looks at price alone rather than the bigger picture.

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This is arguably all you need to consider if you are an execution-only client dealing online - in fact, you could simply chase the lowest price from one broker to the next. However, if you need to deal in any other way, this approach will have administrative drawbacks - most notably, a messy scattering of nominee accounts. So Kevin Sloane at the Association of Private Client Investment Managers and Stockbrokers (APCIMS), believes it makes more sense to choose a good provider and stick with it. And that's where the other data in our tables can help.

The services to look for will depend on how actively involved you wish to be in the selection and management of your share portfolio. Most investors chronicle readers take a relatively hands-on approach, so you are probably interested primarily in the execution-only options, either online or phone-based.

Online is cheapest

Online services are the cheapest and, if you're comfortable on the internet, they also offer great flexibility (you can place a deal at any time of day or night), convenience (view your account on screen), plus, to a greater or lesser extent, facilities such as real-time dealing, research, analysis and on-screen tools. The value of website tools and analysis will vary from one

investor to the next, but the quality and user-friendliness of the website is an important consideration, so compare several before you commit yourself.

If you want an execution-only (XO) service, ask yourself if you need to deal both online and over the phone without worrying about price differentials. If you do, look for the handful of brokers that charge the same for both methods, for example Midas, SelfTrade, Jarvis or The Share Centre. Most other firms have a different charging structure for phone deals, and some are markedly more expensive than their online offering. A dramatic example is that of Hoodless Brennan: a £25,000 trade online will cost just £7, but if you make the mistake of picking up the phone to place the trade, you'll be charged a steamy £285.

If you want to trade beyond direct equities, for instance utilising contracts for difference or exchange-traded funds, your choice of execution-only broker will be limited by the range of assets and products on offer. Our tables indicate what each firm deals in. Some, such as Norwich & Peterborough's dealing arm, offer only Aim stocks in addition to the main equity market, while others, for instance E*Trade, offer a very wide range.

Your choice will be further restricted if you want certificated trading rather than the pooled nominee account used by most XO firms. For a start, you can't trade paper online - most phone-based services will accept certificated deals, but charge you a premium, typically £5 or £10, for the privilege. Any certificated surcharge is shown in the 'other per bargain fee' column of the tables, starting on page v.

Other costs to watch include the rate of interest paid on cash balances held in readiness for trading, which can vary widely. Fastrade, for instance, pays 3 per cent on balances up to £10,000, and 4.75 per cent above, whereas RBS Sharedealers pays just 0.5 per cent to 1 per cent and Lloyds TSB Shareview a paltry 0.35 per cent.

Finally, watch out for quarterly or annual administration charges. Many execution-only firms don't levy such a charge, or waive it if you trade in the quarter. So if you're paying one, be sure the rest of the service makes it worthwhile.

Advice doesn't have to cost more

If you want advice on individual stock purchases or sales, you won't usually have to pay an annual fee (as you would for portfolio management services), but nor should you expect to see cut-price commission rates for trading. Commissions are almost all worked out on a tiered percentage basis. The exception to this is The Share Centre, which offers a free advice phoneline on both the £7.50 fixed rate and the variable tariffs.

Again, it depends what you require. If you can find a broker whose opinion you value, and with whom you would like to have regular contact regarding possible buys or sells, then you may feel the higher dealing costs are worthwhile. But if you simply want an occasional sounding board for ideas, The Share Centre's free advice line might suffice - particularly as it can be used whether you trade online or over the phone.  

At the top end of the stockbroker spectrum, discretionary and advisory portfolio management services entail an annual fee as well as dealing commission and, increasingly, a more 'bespoke' package of wealth management services, so it becomes harder to compare like with like.

You therefore need to make a judgement about the range of investment services on offer, as well as considering qualitative factors such as whether or not you like or trust your relationship manager. That is why we do not select price-based best buys for portfolio management. For performance information, look at the FTSE/APCIMS benchmark portfolio indices for various portfolio models, published weekly in the Financial Times.

Finally, in looking at the balance between fees and dealing commissions, it's worth bearing in mind that you'll pay VAT on fees but not on commission charges. That's one reason why the idea of 'clean fees' inclusive of all dealing costs for discretionary management is not more widespread, although Taylor Young is one offering the option and Rensburg Sheppards also operates on that basis.

A changing market

Overall, though, there is less choice this year as consolidation continues steadily, says Kevin Sloane of APCIMS. The past year has seen the takeover of Carr Sheppards by Rensburg to create investment manager Rensburg Sheppards, the recent acquisition of Williams de Broë by Evolution Group, the absorption of Squaregain into SelfTrade and the takeover of American Express Sharepeople by TD Waterhouse.

However, at the same time some new players are emerging into the broking arena - most notably from the realms of private banking and traditional wealth management firms. Relatively recent recruits to APCIMS include private bank C Hoare & Co and investment management firms such as Savoy. "I think it reflects the fact that there's a growing target market of wealthy individuals with increasingly sophisticated requirements, and so more organisations are chasing them," says Mr Sloane.

This continuing reorganisation of the broking arena has taken place against a fairly positive backdrop of rising markets during 2005 and the first quarter of 2006. Yet, perhaps surprisingly, last year's strengthening equity markets failed to translate into a rush of extra business for the UK's execution-only stockbrokers. "It was a so-so year, with trading volumes going sideways rather than up as they did from 1998 to 2000," observes Richard Bethell of wealth management research company ComPeer. The first quarter of this year, however, was a much more encouraging period, with XO revenues up by around a third over 2005's level, as the bull market galloped on.

Contracts for difference

Why were share traders apparently resistant to the pull of the equity markets as they rose during 2005? According to Mr Bethel: "There was a massive increase in the use of contracts for difference (CFDs) and spread betting by active traders. CFD volumes through execution only traders were up by 57 per cent over 2005, and we estimate that retail stockbrokers now account for around 17 per cent of this market [the bulk of CFD trades are still carried out through specialist firms]".

CFDs have become this popular with frequent traders because they do not attract the 0.5 per cent stamp duty that eats away at share  traders' profits. As a consequence, brokers across the spectrum have set up CFD offerings for clients. Several, including Barclays, E*Trade and TD Waterhouse, have set up their own operations. But, in many cases, they're buying in a service from specialist spread-betting firms such as IG Index. Even one or two advice-orientated firms such as Killik are now moving into the CFD arena on an advisory basis, although it's very limited. Still, as Richard Bethel observes, this advisory approach could be advantageous both for the specialist spread-betting firms, which are not themselves well geared up to catering for a mass market and for the clients, who receive a helping hand in what is probably unfamiliar terrain.

Online growth

More generally, the growth in online trading continued throughout 2005 and now outstrips phone-based execution-only dealing, accounting for around 58 per cent of execution-only trade by volume and still rising. The online price war rumbles on, too: more competitive pricing structures have been introduced, for example, by E*Trade and Norwich & Peterborough. Meanwhile, Jarvis has launched a new flat-fee service at a rock-bottom £5.95, although it does involve a £10 monthly management fee.

Portfolio management

At the upper end of the spectrum, though, there's something of a conflict of perspectives. Richard Bethel reports an interesting shift towards advisory services, with advisory revenues up by 11 per cent after a three-year decline. "It may be a reflection of the fact that the new money is coming from people familiar with the investment world, who want to be involved with the management of their money rather than giving discretion to the manager," he observes.

But that's not the view of Mr Sloane at APCIMS, who sees a continuation of the move towards discretionary management that has been evident since 2001. He also notes that there's an increasingly diverse range of products and services being offered at the top end, in line with a push by these stockbrokers to reinvent themselves in a more holistic role, as 'wealth management firms'. Self-invested personal pensions (Sipps), individual savings accounts (Isas), CFDs and derivatives now sit on the menu of services, alongside financial planning and tax advice. "And if they don't offer it in house they'll badge it up from an outside supplier," Mr Sloane adds.

A broader range of tailored products is certainly the way things are going at Charles Stanley, agrees the firm's Brian Mairs. "Discretionary management, which now includes lifestyle options such as Sipps, small self-administered schemes (SSASs) and our inheritance tax portfolio management service, is the firm's main strength," he says.

Charles Stanley is also launching and making greater use of in-house collective investments, including an international fund of funds and an open-ended investment company (Oeic). In fact, fund management by wealth managers is a trend noted by the latest Compeer report, which finds that "total holdings in collectives have more than doubled over the past four years".

According to Richard Bethel, this growth in the use of collective investments by portfolio managers is one reason why, despite the strength of the market, holdings in direct UK equities have been reducing as people have, on average, sold more than they've bought. Other influential factors include the popularity of CFDs among frequent traders, as well as the ongoing sale of UK plc, as major companies (so far including O2, Pilkington and Abbey National) are bought up by foreign investors and small-scale shareholders sell out.

For details of our BEST BUY brokers in various areas, plus a full table of stockbroker services and costs, click here

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