One of the most pressing issues facing investors is how and on what criteria to choose an account from the numerous broking accounts being offered by banks, stockbrokers, and on-line websites. It’s a far cry from the good old days when the bank or broker, for a fixed fee made securities investment so simple. Today, investors are faced with a myriad of account choices and a labyrinth of providers all offering inducements for new account holders.
Investors are complex, and have different and changing needs. An account perfectly suited to one person may fail to meet the expectations of someone else. As a result, investors should not hesitate to open more appropriate accounts if their needs change. The starting point must be to ask oneself three main questions:
Types of dealing service
Firstly, what type of provider do I feel most comfortable with? There are three main types of ‘provider’ in the United Kingdom:
- An institution such as a bank. Banks are usually flexible on the type of account and service offered.
- A stockbroker. Stockbrokers are usually flexible on the type of account and service but have certain traditions that may limit their scope.
- An on-line website. These are cost-effective and efficient but only offer ‘execution-only’ services.
What kind of investor are you?
Secondly, what type of investor do you expect to be? How will the portfolio be run and what kind of investments will it hold? These are the substantial, factual grounds for differentiating accounts according to the investor’s intentions in relation to their portfolios. I have simplified the two main categories of UK equity investors:
- Active investors’ — This group trades frequently. They sell and purchase UK investments primarily but maybe also own overseas shares. Active investors tend to prefer ‘dealing’ accounts and their top concerns are dealing costs.
- ‘Passive investors’ — This group buys and holds a portfolio of UK shares for the long term or some specific purpose. The investments are infrequently traded. The collection of dividends, portfolio administration and tax planning are relevant to this group. Most passive accounts are simply called ‘accounts’.
Then you should ask what type of service do you expect from the account provider.
- ‘Execution Only’ — i.e., the bank/stockbroker acts as agent for the investor, buying and selling stocks on receiving specific instructions.
- ‘Advisory’ — i.e., the bank/stockbroker advises on investments but the investor has the final say on the sale or purchase of the investment.
- ‘Discretionary’ — the bank/stockbroker has total discretion in the sale and purchase of assets that meet the client’s mandated requirements.
Costs of services vary
The cost implications vary between all three parameters: the provider, the type of account and the type of service. Of the three main providers, the on-line sites are cheapest (but offer a very limited service), followed closely by the stockbroker. Banks are the least flexible on costs but tend to offer very flexible accounts and a range of services.
As for the types of service, discretionary services are the most pricey followed by advisory services. Execution services are the most competitively priced services because the vast majority of investors use brokers on an ‘execution-only’ basis. The reason for this simplistic review is to ensure that when choosing an account you have first thought carefully about your own requirements. Only then can you determine the most suitable account for your needs.
Can your broker cope with a busy day?
When considering the merits of the three types of provider, you should envisage a hectic trading day with large volumes. Ideally, a rapid stock transaction is desirable. The problem on very busy days is getting through to the broker. The often cited example of brokers not picking up the phone during the 1987 stock market crash did great damage to the assumption that the trusty broker was always on the end of a telephone. Indeed, the problem is still very real. In the busy days in the first quarter of 2000 it took some time to get through the telephone queuing system, to a dealer. Once able to speak to a broker the investor can also get some market insight that may be helpful.
Banks can be equally slow, but have the advantage of being able to afford large call centres and, hence, can handle larger volumes of customer calls. The banks though tend to be more impersonal in that the individual transacting on a client’s behalf is simply pressing buttons and has little or no feel for the market.
On-line websites have come a very long way; though oldfashioned types like myself still feel the absence of a human interface, which does leave the investor wondering if everything has gone through. The email system also noticeably slows down during some hours of the day, usually when the USA wakes up. Also many sites hold the stock as nominees, so the certificates never arrive in the investor’s name. It can be a strange feeling to have a website holding onto a chunk of your shareholdings. However, my view is not substantiated by the fact that websites have had by far the most rapid growth in new client accounts over the last 3 years.
An investor facing the ‘which broker’ dilemma should find the above helpful. These days, with so many competing technologies, one’s personal preferences can be an important factor in your choice of financial agent or manager
