Shares digital

With the market in the volatile state it is, having a dedicated team of professionals on hand with their informed opinion can prove invaluable. David Burrows signs up

For some people taking advice on stock selection is just not the done thing. However, for every trader who likes the thrill of going it alone there is an investor who at least wants a second opinion – and a second opinion specifically from a professional.

When it became apparent after the tech bubble burst in 2000 that it was still possible to lose big on the stockmarket, investors realised the inherent risks of using execution-only brokers.

Anthony Scott director private clients at Charles Stanley explains: ‘I think 2000 represented a real shift in business, it proved to many investors that they needed someone to point out the risk. Back then we saw many execution-only investors switching to an advisory service. While we haven’t seen a major shift towards advisory from execution-only in the last 12 months, you have to realise that advisory services are already very popular anyway.’

Charlotte Black head of corporate affairs at Brewin Dolphin echoes Scott’s sentiments. ‘I think it is fair to say that in these volatile markets we are getting a lot more calls from clients wanting reassurance and in general sounding things out. I think there has been a subtle shift towards advisory services but to be honest clients want different things – some clients will always want to go it alone. In an ideal world we would try and persuade everyone to sign up to a discretionary service. For instance as an advisory broker we are not always able to get hold of a client but our hands our tied and we can’t act unless we have their say so. So from our perspective we would prefer a discretionary arrangement but that is not everyone’s cup of tea.’

What advisory brokers offer

For those who do want someone on their side when it comes to stock and fund selection, Scott explains there are difference advisory services available.

‘It really is horses for courses; we offer an Advisory Dealing Service and a Portfolio Managed Service. With advisory dealing it is a case of a client contacting us and asking, “I’m thinking about buying Tesco shares what do you think?” We will then give our view on Tesco shares at that given time. The advice is given in isolation and is completely different to how our Portfolio Managed Service works. With Portfolio Managed we may be asked the same question by the client but we will look at how buying Tesco fits in with the whole portfolio. So for instance, in both cases we think Tesco is a “buy” but with the portfolio service we see the need to point out that the client already has heavy exposure to UK food retailers. Also with the portfolio service we may contact the client and suggest a buy or a disposal – so it is far more a two-way process.’

Charles Stanley currently charges adviser commission of 1.85% on £10,000 of any bargain; then 0.5% on the next £90,000 and 0.25% on the balance. On top of that those using the Portfolio Managed service will pay a 0.5% per annum fee.

Black explains that clients have a similar choice of services at Brewin Dolphin. ‘With our reactive Advisory Dealing service we provide valuations, tax reports and so on but in terms of advice on sharedealing we wait for the client to ring us. With our advisory managed service, it is far more about us contacting the client. It is really up to the client how much they want us involved. In terms of what we charge that will vary from client to client depending on their circumstances and whether they prefer commissions or flat fees.’

Sometimes a client will initially want the cheaper costs of execution only but an initial conversation with the broker can often clarify what is the most suitable service, as Scott explains. ‘When we make our first contact with a client we try to clarify which service best suits their needs – in many instances clients only have a very rudimentary understanding of what an advisory or execution-only service is.’

Added value

So what is the key selling point of an advisory service? Some would argue that with access to research tools, online valuations and efficient online trading, the private investor has little need for an advisory broker these days. Not surprisingly Scott is having none of that.

‘Certainly the private investor now has access online to research and information that was just not available until recently, but this only goes so far. For instance if a client says they just want an Asia Pacific fund they can pretty much go on Trustnet and find what they need to know, but it is much more difficult where specific stocks are concerned.

‘You really have to listen and interpret the market. For example, the price of wheat goes crazy so the cost of bread rises but also means more expensive materials for the big pasta/pizza manufacturers/restaurant chains. The private investor is seldom in a position to pick up and see the implications of these things on a daily basis.’

Scott adds: ‘Look at the Aim market with thousands of companies in there, the brokers are in touch with the market and have the resources and opportunity to visit companies and fund managers on a regular basis. They know what is going on first hand and the benefit of this is immeasurable to the client. Also what happens if a client goes on holiday for two weeks are they really going to want to be glued to a laptop the entire time checking their portfolio?’

Georgina Mitchell, head of investment services at Redmayne Bentley agrees that for most private investors the time factor is really not on their side when it comes to trading efficiently. ‘Keeping track of a share portfolio is incredibly time consuming, so unless you are retired and it is your passionate hobby then using an advisory broker is the only way to keep on top of things. Even if you do have time to research stocks are you really able to get the market timing right? With a broker you have a team of professionals constantly monitoring a continual flow of news and they are in a position to monitor market makers, volumes of buying and how many shares are being made available. I would argue that brokers do have access to more information but the real issue is interpreting information.’

Scott also insists the broker adds value by ensuring clients don’t exceed CGT allowances unnecessarily and are also in a position to negotiate better deals when buying into funds. ‘We can negotiate discounts with underlying managers of funds and we can also fit an advisory service into an entire financial planning package, for instance we have our own SIPP provider. Keeping savings, investments and pensions together in one place makes good sense.’

With an advisory service the central focus is the relationship between the client and the broker and it is for that very reason that direct access to a dedicated and named broker is essential.

‘All of my clients go direct to me,’ Scott explains. ‘There is no messing about with a switchboard. While much of the contact is done over the phone, we do encourage clients to meet us face to face.’

Black reinforces this idea of accessibility. ‘A lead director is assigned to each client portfolio but clients also know at least two to three other members of the team. The bottom line is that there is always someone familiar there for the client to deal with.’

The Good, the bad and the ugly

In the same way as IFAs are often given short shrift, advisory stockbrokers over the years have come in for some bad press – specifically when advising very active trading on the part of the client when it is in the broker’s and not the client’s best interest.

Mitchell at Redmayne Bentley thinks the scene is a lot brighter these days. ‘I think the industry has cleaned up its act and I think fees have helped that. You don’t get better fees by trading more frequently. Once we have ascertained a client’s investment objectives and risk profile, we recommend the same to an advisory client as we would to a discretionary client. I think it is also important to point out the clarity of how and what we charge, which I think fits in with the Financial Services Authority’s current “Treating Customers Fairly” initiative. Our portfolio management fee is 0.85pc and our commission charges for trading are the same as with our execution-only clients. When we get to investors of £500,000 or more, then fees are negotiable.’

Black makes the point that brokers are now obliged to show that their advice is appropriate even if it is the client who makes the final investment decision. ‘Under the FSA rules we have to demonstrate that our advice is suitable and that we continue to monitor client objectives. All the information and advice we give has to be recorded.’

Minimum investments

While there is no hard and fast rule to who can and should use advisory services, the general rule of thumb is that it is ideally suited to investors with portfolios of £50,000 or more. For those with more modest portfolios, other services are generally deemed more appropriate – collective funds and self-select ISAs.

‘You are talking about portfolios of £50k to £100k in size for advisory or discretionary portfolios, otherwise it is just not cost effective in terms of charges and so on,’ says Scott. ‘With regards to choosing a broker, we get the bulk of our new business via recommendations from existing clients. If you don’t provide a decent service then you don’t get recommendations – it’s as simple as that. Having a bit of history helps too.’