Nick Sudbury looks at what investors can expect from execution-only share dealing services.

Those who prefer to make their own investment decisions have plenty of options when it comes to finding a suitable broker. As an absolute minimum they should expect good-value online and telephone trading in UK equities and funds. There is also a decent chance that investors may even find a service that gives them everything they want, although the more discerning will probably need to open accounts with more
than one firm.   

‘Investors should ensure that their broker provides access to a range of different investments, including UK and international shares, managed funds and ETFs,’ says Stephen Barber, head of research at Selftrade. ‘It is also important to have the tax-efficient options of an ISA and SIPP, as well as that of a normal dealing account.’

Share dealing
People who trade shares on a fairly regular basis should look for a broker that can beat the prices available on the London Stock Exchange. This is possible as some online platforms take the investor’s order and then poll a network of market-makers to see if any will improve on the best bid and offer. This sort of system usually allows the near-instantaneous execution of all trades under the ‘normal market size’.

‘At Selftrade, we actually connect to up to 20 market-makers, and this enables us to beat the price quoted by the London Stock Exchange around 80 to 90 per cent of the time,’ says Barber.

‘Those who want to place large orders, or trade in the less liquid small-caps, can phone the dealing desk who will then speak to the market to get the best price.’

Some providers offer more specific services aimed at regular investors. For example, Halifax Share Dealing offers ShareBuilder, a monthly online savings plan that allows regular investments to be made for £1.50 per trade.

Looking further afield
In the current volatile conditions, it is extremely useful to have a broker that supports limits and stops. A limit order can be left in the market, so as to automatically open a position at a more favourable level or close a trade to take profits. Stops are even more important as they can be used to cap the potential loss by triggering a sale if the stock falls to a pre-defined level.

Investors who want to buy and sell international shares need to check what their broker has to offer, as most only provide access to the 600 or so large European and US stocks traded in sterling on the LSE. The main problem with this type of service is the relative lack of liquidity, which can result in high bid-offer spreads. 

James Daly from TD Waterhouse’s Investor Centre says, ‘We offer direct share dealing on 16 overseas markets covering the US, mainland Europe and Asia, which means clients can trade any stock listed on these exchanges. And the cost to trade internationally is the same as trading in UK stocks.’

Cost and reliability
The average commission for an online share trade is around £12 to £15. It is worth bearing in mind that some providers, such as Barclays and NatWest, charge considerably more for telephone orders, though others, like Selftrade, just apply the one flat-rate fee. Regular traders who typically deal 12 or more times per quarter may also be entitled to an active trader discount.

Few providers levy any kind of charge for opening an account, but there will typically be an annual management fee. In some cases, this is based on the value of the total holdings, but it is becoming more common for it to be a flat rate, which works out better value for those with larger portfolios. Two of the cheaper options are iDealing.com, which charges a flat £5 per quarter, and Selftrade, with its annual fee of £25. A few firms also levy an inactivity fee, so infrequent traders should check this out before opening an account.

For the most part, the difference in cost is not that significant, so investors should concentrate more on the quality and reliability of the service, as well as whether there are any research facilities that they think might come in useful.

‘Word of mouth is a powerful thing, and with the advent of social networking, blogs and chat rooms, potential customers can easily investigate their prospective broker just by reading about other people’s experiences,’ says Daly.

The freedom of funds
Most stockbrokers allow investors to buy and sell managed funds in the same account as their shares. This gives people the freedom to build a fully diversified portfolio while keeping the admin as simple as possible. The same sort of service is also available from Hargreaves Lansdown and Alliance Trust Savings, though the majority of IFAs only allow clients to invest in funds, as is the case with firms such as Chartwell, Bestinvest or Willis Owen.

The most comprehensive services allow investors to choose from over 1,000 funds, which enables them to cherry-pick the best from across the market. It is a similar process to buying shares, except that investors don’t know the exact price they’ll be trading at, as managed funds are not valued on a real-time basis.

‘Almost all funds are dealt once a day, with most being priced at 7am or noon,’ says James Davies from Chartwell. ‘Orders received prior to the cut-off point will be priced accordingly, with the order automatically going through from the broker/IFA to the fund provider.’

Discounting the costs
When buying an open-ended managed fund, like a unit trust or OEIC, there are two distinct charges. The first is an initial deduction of anything from one to six per cent, which represents the commission due to the originating broker or IFA. There is also an annual management charge, or trail fee, of around 1.5 per cent, that is accrued on a daily basis and deducted from the value of the fund. This is split between the broker, adviser and fund manager.

‘The discount brokerage services from IFAs discount some or all of the initial commission,’ says Davies. ‘Our entitlement is typically between three and five per cent, but at Chartwell we rebate the lot so investors can get in at zero initial cost.’

Investors who hold their funds for any length of time will probably end up paying more in annual charges. Some brokers rebate part of this trail fee, which is a valuable feature, especially for those with sizeable holdings.

‘We share the trail commission with our clients and, depending on the fund, will rebate up to 0.5 per cent as a loyalty bonus,’ says Meera Patel, senior analyst at Hargreaves Lansdown.

Doing the research
Fund investors can access the historical performance and the latest fact sheets, which include the views of the manager and details of the major holdings. Most brokers also provide investment ideas and model portfolios, with one of the most useful guides being Hargreaves Lansdown’s Wealth 150. This is available on the company’s website and represents what they believe to be the top 150 funds.

‘We have face-to-face meetings with the managers and carry out quantitative analysis on the funds to identify how they actually add value,’ says Patel. ‘We then use this information to sieve the fund universe to come up with our Wealth 150 – a list of the 150 funds we think will deliver the best performance over time.’

Those considering investing directly in shares can access all the relevant news stories including the recent company results. Generally, they will also be able to chart the share price performance and view summary financial data, as well as consensus broker forecasts. Anyone who wants tailored advice will usually have to pay for it, but clients of The Share Centre can register to receive this free of charge.

‘We offer all the benefits of individual advice without any of the cost,’ says Guy Knight, group sales and marketing director at The Share Centre. ‘Every conversation is different, as some clients phone to discuss their portfolio and investment strategy, while others want specific share or fund recommendations.