Andrew 2 – we have two Andrews – couldn’t wait for last month’s meeting to start. He broached the subject of stockbrokers as we tucked into the antipasti. ‘We should change stockbrokers,’ he said decisively. ‘Move to one of the big firms. Those that do all the research for us and tell us what to buy and when to sell. Saves us doing all the work for ourselves.’

As evidence he waved a 25-page research report by one of the largest stockbrokers in
the City. Ignoring the fact that the document was two months out of date, Andrew cited it
as the reason for buying a recommended stock. Predictably, I counselled caution, suggesting it would be sensible to do some in-depth digging of our own.

I ignored the ensuing ribaldry and explained the stockbroker scene and why the club could not and should not enjoy the services of the brokers that produced the report.

Understanding brokers
There are basically three kinds of stockbroker. Starting with the most rarefied – and including the one that produced Andrew 2’s report – the discretionary broker usually takes responsibility for managing your entire portfolio. Most of the really successful discretionary firms are a bit sniffy about handling a portfolio of less than £250,000 and my suspicion is that you only get their full attention if you hand over more than £1 million.

Next in line is the advisory broker. This one gets instructions from you on what sort of investor you are – high risk, conservative, etc – then advises you on what they think you should buy or sell. You can also consult them for their opinion of a particular share that you fancy.

Simple but effectiveLastly, there is the execution-only broker. Here is the real bookmaker of the pack. Theirs is the cheapest kind of service. All they do is carry out your instructions on what to buy or sell. There is no use asking them for a tip or an opinion on a share.

The executioner just takes your bet, and his fees for turning it into a stock market transaction are comparatively low. This, and because we are set up to research and select our own shares, is why investment clubs invariably use execution-only brokers.

Behind the smokescreen
My beef is that, like lawyers and electrical repairmen, many stockbrokers tend to camouflage what is a relatively simple job with waffle. Those who take big annual fees rarely reduce them when your portfolio nosedives. They blame the markets or the world economy, but never themselves. Those who are qualified to give advice are invariably reactive rather than proactive. Getting a simple buy, sell, or do-nothing opinion
is almost an impossibility – I have a published list of 42 different phrases used by brokers to avoid a positive decision.

And the basic order takers prove to be a major hindrance to the private investor, because they insist that shares be held in their nominee accounts rather then registered in the names of their clients. Also, they do not pass on to investors important communications, such as annual reports and interim statements.