Advisory broking has struggled to shake off its bow-tie and braces image. It harks back to a more genteel era in the City when brokers took their clients to lunch at the Savoy Grill and portfolio changes would be discussed over the cheese course. But then came the technology bubble, the internet and the FSA. Clients became more discerning and money became harder to make. How has advisory broking adapted to the new era?

The old world was largely commission based. It was a relationship business where brokers would sell ideas to clients and make their money on buying and selling stocks. Clients trusted their brokers because of long-standing relationships or because they had made good money for them before. It suited a less regulated era, where there was less publicly available information and brokers could act on proprietary information and tips.

A tough universe
But a number of things changed. The fall-out from the technology bubble hurt the reputation of US-based sell-side brokers. The US broking giants were found to have been colluding with their corporate finance departments to issue buy recommendations in exchange for fee business.

The technology bubble also exposed some spectacularly bad, high-profile recommendations. At the time of its merger with Mannesmann in February 2000, Vodafone traded at a market capitalisation of around £228 billion, with almost every broker rating it a buy or strong buy. Today it trades at a market capitalisation of £98.44 billion with a price of just £1.84 – nevertheless, its highest point since May 2001. It became clear that while it was easy to make money in the buoyant stock markets of the 1990s, the crash of 2000 had ushered in a new and more accountable era.

Peter Long, a divisional director at Brewin Dolphin, says that while UK stockbrokers didn’t have the problems of their US equivalents, the downturn confirmed for many clients that stock markets had become more global and complex. This pushed clients to cede greater control to their brokers. Many went down the discretionary route, while those who wanted to retain some control over their portfolios decided they needed a more sophisticated service.

Engaged investors
Max Caris-Harris, investment director at Collins Stewart, believes a greater availability of information saw clients become more engaged with their portfolios: ‘The internet gave clients more access to information. The typical advisory client likes to have the final say and has more time than the average discretionary client. Over the past few years investors have had access to more platforms for dealing, and the markets are now more sophisticated.’

He adds, ‘The financial press has also become more predictive. Products like soft commodities are now mentioned in the press and so have become a more mainstream asset class. All these things mean that brokers are expected to offer a more inclusive service.’

Regulation is also now more stringent. In the wake of a number of scandals, the FSA has tightened rules on knowing your customer and the suitability of advice. This prevents, among other things, brokers churning investments to generate commissions or recommending risky investments to the wrong clients.

This even applies to the most basic advice service. As Guy Knight, sales and marketing director at the Share Centre, points out, ‘Our telephone advice service is free, but we still need to know our client. We would always check if an investor had, say, large credit card debts.’

The shape of things to come
So what does the market look like now? Mark Garrett, a director at Smith & Williamson Financial Services, says that ten years ago almost all business was conducted according to the old model, where clients had a traditional portfolio of investment trusts, unit trusts and a number of shares, and were given advice at regular intervals.

He adds, ‘We don’t do very much of this type of business now, and when we do, it tends to be investors coming to us rather than us going to them. It is a labour-intensive business.’

Brewin Dolphin’s Long agrees that the days of traditional stockbroking, where a client calls up for stock recommendations, have dwindled. Although most brokers still offer it as a service, it’s used much less frequently.

The modern approach is to offer a managed advisory service. This is either managed on a fee or fee-plus-commission basis, based on assets under management.
The broker undertakes a risk assessment of the client and selects an appropriate asset allocation. Within those parameters, they then select funds or shares in consultation with the investor.

The broker then suggests ideas or adjustments to the portfolio in response to market conditions, new stock ideas or changes in the client’s circumstances.

Garrett says, ‘We launched our service five years ago, having found there was a need for an advisory service for clients where they’re involved in the decision-making process. As it’s largely fee based, we have a vested interest in growing the assets over time. It is not based on churning client assets.’

Smith & Williamson’s Advisory Investment Services manages fund-based portfolios from around £250,000 to £100 million and charges a percentage of assets under management (0.75 per cent for under £1m, 0.4 per cent for over £1m) with a 0.5 per cent commission on transactions.

Collins Stewart’s advisory managed service uses the same asset allocation and investment process as its discretionary service but gives the investor the final say. The service is run on a mixture of fees and commissions, but commissions are lower than for its traditional broking service.

What size portfolio?
The entry point for this type of service varies considerably, but it tends to be similar to that of discretionary portfolios, and hasn’t changed significantly in a decade. Brewin Dolphin, for example, has no fixed minimum for its portfolios. Long says that those of under £100,000 tend to be invested in collective funds, but clients are welcome to discuss stock ideas with the portfolio manager.

Other services look more like traditional advisory stockbroking arrangements but are structured differently. The Share Centre runs a telephone advice service alongside its execution-only service. This is commission-based, but the group still has to do basic background checks on the client’s financial situation. As Knight points out, ‘This type of client will typically say, “I’ve inherited £5,000, where do I start?” or they might ask whether biotechnology is a good investment. We would then say that we believe stock X or stock Y is a buy or sell. The important difference is that we don’t then monitor that advice. We’re under no obligation to come back to the client and say how that stock has performed.’

Knight says that this type of service reaches out to those on the cusp of investing in the stock market for the first time – a group currently under-serviced by the wider financial services market. He adds, ‘They may be people in their mid-40s, who still have time to sort out their future. They’re seeing light at the end of the tunnel of childcare, but may still have 20 years of work left and need to take control of their own destiny.’ The service starts at £10 a month or £500 for a lump sum.

Hands-on approach
The managed advisory service attracts a long-term, ‘engaged’ investor, with sufficient time on their hands to take an interest in their portfolio. Garrett explains, ‘The reality is that most individuals, even those who are financially naive, would rather get involved
in their long-term planning.’ It tends to be a lack of time or knowledge that pushes people towards a discretionary portfolio management service.

Indeed, Garrett, Long and Caris-Harris all agree that the typical managed advisory investor doesn’t differ, in wealth terms, from the average discretionary client. Most of these are long-term investors, prioritising capital preservation rather than significant growth. Caris-Harris notes, ‘Most of our clients will accept their portfolio rising less than the market on the way up, in return for less risk.’

All part of the service
Research and performance monitoring for these portfolios is usually done in house. Collins Stewart, for example, uses proprietary cash-flow analysis system Quest as a basis for selecting stocks. This incorporates performance and risk management. The group’s brokers are constantly monitored to ensure they’re not underperforming, or outperforming by taking too much risk. Brewin Dolphin’s in-house team rates the top 350 stocks, plus unit trusts/OEICs and bonds. It then buys in research from other analysts for other areas of the market.