Choosing a stockbroker that suits your needs is like trying to find a restaurant that meets your tastes. For example, if you know what you want, you might go to a self-service buffet where you can pick and choose as you please; much like going to an execution-only broker who will buy and sell shares at your command but leave the decision-making up to you.

A discretionary broker will offer you the full service, akin to a restaurant that provides a set menu, and it will be their responsibility to make investment decisions and buy and sell shares on your behalf. An advisory stockbroker, on the other hand, will offer you the best of both worlds. Like a waiter offering you a cheese board, this stockbroker will provide you with suggestions about shares that you should buy while taking your aims and circumstances into consideration. Unlike a discretionary service, the advisory broker will never make any investment without your authority.

How to find advice

Advisory services are offered by almost all members of the Association of Private Client Investment Managers and Stockbrokers (APCIMS). To find APCIMS members you can search for them on the website www.apcims.co.uk or call APCIMS on 020 7247 7080. You can also find advisory brokers on the London Stock Exchange’s website www.londonstockexchange.com or on Find.co.uk.

Typically, advisory brokers will conduct an initial interview free of charge and obligation, to establish your needs, such as whether you are looking for income or growth on your portfolio. ‘In terms of treating the customer fairly, the broker will be obliged to get to know the client and their needs, and the first session would probably be face to face and involve paperwork to make sure that the broker is providing the best advice,’ says David Bennett, chief executive of APCIMS.

Traditionally, advisory stockbroker services would just be able to inform clients about stocks and shares, but now some offer much more, so it is important to press your stockbroker about what they can advise you on. ‘The investment community has had to change with the times,’ says Bennett. ‘Before, brokers would trade only in stocks and shares, but now they can manage entire portfolios and provide advice on UK shares, cash, commercial property, hedge funds and private equity.’

It is important, however, to know exactly what your needs are and where you want to invest, as some stockbrokers don’t provide advice on every UK stock. Nigel Smith, chief executive officer of broker Hoodless Brennan, says, ‘We offer a number of products, and our advisory service focuses predominantly on providing information on stocks and shares, from the FTSE 100 down to the Alternative Investment Market (AIM). There are quite a few brokers that advise on the FTSE, but only a few provide advice on AIM. There are around 1,650 stocks on AIM, so those that don’t advise on this index are missing out.’

Finding out what kind of advice is on offer is essential as this can vary too. Charles Stanley, for example, offers two types of advisory services: a portfolio management service and a dealing service. ‘Under the advisory portfolio service, we discuss our clients’ investment objectives and requirements with them in advance, and our investment recommendations are then made within these guidelines and with reference to the portfolio as a whole.

‘This service provides each client with regular portfolio valuations at least every six months, and additional benefits include access to our financial planning staff, guidance on tax planning, nominee services and our monthly newsletter,’ says Conrad Simmons, investment manager at Charles Stanley.

He adds, ‘With our dealing service, we will provide advice on individual stocks and shares and initiate ideas and recommendations. This arrangement differs from the portfolio service, in that the portfolio is not being managed. Advice is, therefore, limited to the suitability of the individual stock or transaction in light of the client’s objectives and requirements at the time.’

Researching your broker

If you are trying to find a stockbroker without any recommendations from friends or family, don’t be shy about asking your broker for their record. It is, after all, your hard-earned money that you are investing, and you need to deal with someone you can trust. ‘It is very hard to work out whether a stockbroker is good, but you could ask them to produce proof. Some might provide a track record based on a model portfolio,’ says Justin Modray of financial adviser Bestinvest. ‘Failing that, you could ask your broker for recommendations from their clients.’

How a broker conducts research should also be taken into consideration. Some conduct in-house research while others consult external analysts for information too.

You should ask your broker why they are recommending a particular stock and on what basis they came to make that decision, to rule out any conflict of interest. ‘Where we deal as principal on a stock, we will tell our customers that, and say why they should invest in it. Any broker should say what their interests in a stock are and provide pros and cons to investing in it,’ advises Smith.

Advice costs

The one downside to going down the advisory route is that it is more expensive than a simple dealing service because you are paying for advice. The good news, however, is that advisory services are not as expensive as discretionary, because discretionary charge you extra for using their investment expertise and time in making decisions on your portfolio on your behalf. Advisory brokers differ on charges, and this is why it is important to shop around.

Charges usually consist of an advisory fee and a dealing fee. For example, Charles Stanley’s rates per transaction are 1.85 per cent on the first £10,000 and 0.5 per cent on the next £90,000. Their advisory portfolio service also attracts a management fee, set by negotiation, subject to a minimum charge of £200 per annum. Hoodless Brennan, meanwhile, charges 1.65 per cent for trades up to £10,000 and 0.8 per cent for trades above £10,000. Bear in mind that you would also need to pay stamp duty of at least 0.5 per cent, which is added to the cost of all shares bought.

Some brokers charge for their advice in the form of a flat annual fee for unlimited advice or a fee for a limited number of recommendations. Others are paid by commission. ‘Choice should be based on value for money and how good the broker’s research is. But there is no point in paying through the roof for even a good broker because that negates any returns they would make for you,’ advises Modray.

Some brokers can charge vast sums for handling your portfolio, but don’t be seduced by low fees alone. It is important to find a balance. ‘People don’t always go for the cheapest advisory stockbroker. Many go for a recognised brand that is competitive in terms of price,’ adds Stuart Glendinning, managing director of Moneysupermarket.com.

Getting the right fit

In the end, the stockbroker service you choose will depend on your confidence and experience as an investor. Don’t be put off by the fact that stockbrokers used to be exclusively accessible to high-net-worth individuals that have sound investment knowledge. All this has changed in recent years and their services have become more accessible.

‘Minimum investment requirements now vary from firm to firm. A number of stockbrokers are no longer just looking for high-net-worth individuals. There are enough people on the street with portfolios, and stockbrokers are happy to advise them. But some still have higher investment thresholds and it is a question of ringing up and finding this out,’ says Bennett.

Making investment decisions for your own portfolio can be quite challenging, but with an advisory stockbroker it is easier to make the right choice. Although there is an abundance of research and literature on individual stocks available online and in the papers, if you are uncertain about your needs it is always best to get advice. As Nigel Smith says, ‘More nervous investors should go for advisory services. If they don’t know a particular market, such as AIM, they may want to get advice until they become more familiar with it.’

This article is from the August 2007 issue of What Investment.