Stockbrokers used to be intimidating people in pinstripe suits. But that has all changed: today's stockbroking is available in a wide variety of forms for a variety of different prices. But what is the difference between a 'bucket shop' execution-only broker and the advisory service offered by long-established firms?
Stockbroking, like so many other services, has morphed from a fairly simple proposition a couple of decades back (go to an office, a man helps you buy shares), to an all-singing, all-dancing variety show involving not just equities but bonds, funds and all sorts of financial instruments. Different forms of broker will suit different types of investor, but there are a few things you should get straight first.
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The first thing to do is look to yourself. It's essential to know what your requirements as an investor are to avoid paying too much or getting too little. "Figure out what you look like financially," advises Alistair Hodgson, a stockbroker with Piling & Co in Manchester. "Do you have all your money in a bank account which you're frightened to come out of? In that case you need a broker who will give you advice."
If, on the other hand, you know what you want - perhaps you have already received advice from an IFA or have just been following the business pages keenly - an execution-only broker who simply takes your instructions - and your money - and buys the stocks with it, could be just the job.
Duncan Jeffery is marketing manager for Hargreaves Lansdown stockbrokers, one of the largest execution-only brokers in the country. "People can research via websites, magazines or search engines and decide what type of service they think they need," he explains. "They have to think about whether they're going to be a fairly regular trader or whether they'll make one-off transactions."
This will determine not only which type of broker to go to but also what type of account to pick, as some brokers offer cheaper transaction fees for customers who trade frequently.
The Association of Private Client Investment Managers and Stockbrokers (APCIMS) is the trade body for brokers of all sorts. Its head of information, Kevin Sloane, points out that at the website www.apcims.co.uk people looking for a broker can request a directory that lists the 200-odd members of the organisation. "You might want to call up two or three you like the look of and have a chat with them, but remember: saying 'I've ended up with these shares through a privatisation. I want to sell them, so you do it and send me the money' is a bit different from saying 'I've got £5 million and I just want you to invest it in a range of things for me.' Depending on the sort of investing you want to do, there is a huge variety of services and niches."
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Bucket shops, otherwise known as execution-only brokers or discount brokers, have been a growing force over recent years, fuelled by the increasing penetration of the internet. They work mainly on a dealing cost basis where you should expect to pay between £7 and £15 per trade. Execution-only brokers deal in the bare, no-frills transaction. They do not provide advice so will not give you any help with building a balanced portfolio. They are for people who already know what stocks they want to invest in.
"If you have had plenty of good advice and you just need someone to facilitate a transaction, you need the execution-only boys like Hargreaves Lansdown," says Piling & Co's Hodgson. "People like them, and firms like TD Waterhouse, work well for high-value investors in the most liquid stocks."
Because the bucket shops have low overheads they are able to give good value for money, which is why they are sometimes called discount brokers. There are now around 30 to choose from in the UK, according to TD Waterhouse's chief executive Michael Foulkes. "Look for a service that's easy to use and provides as much flexibility as you need," he advises. "Services vary in both cost and quality."
He also points out that UK equities and funds can be bought through any discount broker but, otherwise, the range varies widely. "The largest brokers tend to offer the most choice," he adds. "If you're planning to invest in funds, look for a broker that discounts initial fees through its fund supermarket. TD Waterhouse, for example, offers discounts of between 50 and 100 per cent on initial fees."
Wider variety could be one reason to go for more of a full-service, 'traditional' stockbroker. Their more personalised set-up, where the client is far more likely to talk to a broker in person (rather than placing an order on the internet) lends itself better to buying and selling more unusual stocks and instruments.
"If you drop out of the FTSE 250, for example, and look for shares in small and micro-cap companies, you could find that an execution-only broker can't get hold of the stock, or enough of the stock," says Hodgson. "If investment needs are more esoteric or targeted, the full-service stockbroker could be what's required. Someone might want 1,000 shares in a lightly traded stock like Young & Co, the brewer, for example," continues Hodgson. "The market won't give you that so your broker would have to get on the phone, put a few feelers out and see what's out there. That doesn't really fit in with the cheap and cheerful execution-only broking is based on."
Full service stockbrokers can also offer advice - although they don't have to. Going down the advisory route means the broker and customer initially sit together to formulate investment objectives. Then the broker suggests investments that he/she thinks will suit. It's important to remember that the broker acting in an advisory capacity will not manage the investments without consulting the customer first, and that you - the customer - will be responsible for your own decisions, and whether the investments are a dog or a diamond.
The next step up the ladder is the discretionary manager. This is the investment manager who not only buys and sells the stock, but does it off his own bat, without the need to consult the customer.
Discretionary management works by starting off with the construction of a brief with the client, detailing investment aims, level of risk-aversion and other factors that will influence the portfolio. The manager then uses this to make the transactions, sending a contract note every time there is a buy or sell and more detailed reports on a regular basis.
James Anderson is chairman of specialist information provider PAM, which researches information on private asset managers and their clients. Statistics from the PAMonline website show that 32 per cent of money invested over the last 12 months has gone into discretionary mandates. Anderson believes that this figure should be higher, though, and that the team and process elements of discretionary management make it a less risky way of investing.
"Do you want pot luck or process?" asks Anderson. "If you go to a traditional stockbroker, you're more likely to be looking at pot luck, because some firms are still run as quasi-franchises where brokers effectively operate as individuals, making their own investment decisions. The more you go towards a team-based approach, the more you are likely to be buying a transparent investment process based on a consensus view."
You do pay for this team approach, though, and discretionary management is generally for quite high-value portfolios.
According to APCIMS' Kevin Sloane there is a price war going on at the moment that makes costs for stockbroking "pretty dynamic". Certainly in the execution-only market, if you trade more than ten times per quarter, trades can be made for as little as £7.50 with Barclays. Transactions do become cheaper the more you make of them in the execution-only world, but a rule of thumb for a less frequent trader would be charges of £12 to £15.
"Stockbroking firms are always happy to outline their charges," says Sloane. "And if you're looking at discretionary management, that's perhaps a 1 per cent portfolio value charge."
Advisory services will be somewhere between the execution-only and discretionary costs, but it is important to consider whether the size of your portfolio makes it worth using advisory or discretionary broking at all. "We tend to deal with people who have middling to large-sized portfolios from £50,000 to £5 million," says Hodgson. "But if you're just looking for the occasional ad-hoc opinion on stocks, a portfolio of £20,000 upwards would make it worth it."
For a fully bespoke discretionary service, a portfolio of around £100,000 would be needed. Hargreaves Lansdown's Duncan Jeffery adds that no matter what service a person is looking for, their portfolio needs to be large enough to invest across a broad range of areas including market cap, region and asset class.
However, are there are still the stockbroking equivalent of the snake oil salesmen out there who will rob your granny of her life's savings? Possibly; but the stockbroking profession is now so heavily regulated that it is unlikely you will end up with one if you have done a bit of prior research. All stockbrokers are regulated by the Financial Services Authority; they will be members of the London Stock Exchange and often of APCIMS too.
"I can't remember ever seeing a client portfolio that's come to me and thinking 'My God this person's been ripped off,'" says Hodgson. "If you have the right questions, people will always give you the right answers."
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