‘Ready to go it alone?’
MONEYWISE - October 2003
By Sam Barrett
In the last few months, execution-only stockbrokers have emerged from a dark period in their history. Not only have the markets rallied, but also in September the Sword of Damocles was lifted. The European Parliament passed a vote effectively granting execution-only dealing a reprieve from threatened extinction. The threat had emerged in the draft European Investment Services Directive, part of the Financial Services Action Plan, designed to create a single market for financial services in Europe. It contained a proposal requiring all stockbroking firms to conduct suitability tests every time someone trades, to find out whether buying or selling that particular share is appropriate to their financial circumstances. These checks would have been expensive, and would undoubtedly have meant an end to low-cost sharedealing. The vote was still subject to a further vote in the full parliamentary session at the time of Moneywise going to press, but industry commentators believe the preliminary decision is likely to stand.
This decision comes on the back of increasingly good news about trading volumes. For over a year, the figures showed relentless falling business levels, as private investors stepped back from the stockmarket, beaten by the ravages of the downturn. But in June, according to stockbroker research company ComPeer, the declining trading figures were dramatically reversed, with a leap of more that a fifth in trading activity from the previous quarter.
Alison Cashmore, external communications manager of broker TD Waterhouse, is also optimistic: “People are definitely coming back to the markets. Between February and June this year our trading volumes increased by 75%.”
NET RESULTS
The biggest winners to emerge from the renewed vigour in the execution-only market have been the internet brokers. In June, online stockbrokers recorded a 42% increase in business from the previous quarter, and they now account for a third of all execution-only trades. This is hardly surprising; the internet is the natural medium for direct dealing, because it’s fast and cheap – the key requirements of any execution-only trader.
Jonathan Abenyega, head of private investment at ProShare, the independent body that promotes share ownership, agrees: “Holding shares electronically does make it easier and cheaper. It’s also more convenient, as all your shares are held in one place, so you can’t lose track of them.”
Online brokers can afford to offer cheap services because they require less manpower. Without the need to handle calls or open letters, they can cut costs dramatically. Our table of the 20 cheapest execution-only brokers shows that some of the lowest charges are available from online firms such as ShareCrazy.
The other big attraction of online dealing services is that it enables consumers to trade more quickly than older methods.
The traditional way of dealing shares is by holding them as paper certificates and trading them, either by post or in person, at a stockbroker’s branch. The process of organising paperwork and settling the deal can easily take up to 10 days, making dealing slow and cumbersome. Electronic trading, on the other hand, is much quicker. ShareCrazy’s electronic nominee account, for example, settles deals and debits or credits money from your account immediately. This ‘real-time’ trading gives investors greater flexibility to take advantage of share movements.
There are basically two ways to trade shares electronically: through a nominee account with a stockbroker, or through a personal membership with Crest, the UK’s securities depository, used to electronically settle share sales and purchases.
With a nominee account, rather than buying shares in your name, you buy and hold them in your stockbroker’s name – it is effectively the legal owner and you are the legal beneficiary.
This is by far the most widespread form of electronic sharedealing, and some brokers actually insist you hold a nominee account with them to access their execution-only services.
However, nominee accounts do have their drawbacks. Although you will be paid dividends, the shares are not held in your name, so you are not entitled to shareholder rights such as voting, attending annual general meetings or receiving annual reports. So if you were planning to use you share ownership to flex a little shareholder muscle, these accounts won’t be suitable. They also render you ineligible for any shareholder perks that may be available. These are, in any case, becoming less widespread, but are still an important consideration for some traders.
On the other hand, with a Crest personal membership account, you can still electronically trade shares, but you are the legal and beneficial owner of them, giving you full shareholder rights, with you stockbroker taking care of all the ownership transfer arrangements. However, this service comes at an additional cost and is only offered by a handful of execution-only brokers.
BROKER’S FEES
Brokers charge varying fees depending on the type of dealing service you are using – by post, over the phone, on the internet, or in person through a branch – and whether you are using a nominee account or a Crest account.
For example, Barclays Stockbrokers’ cheapest internet dealing service has a flat fee of £17.50. If you buy over the phone, you face a tiered charging structure of between 1.5% and 0.35% (the smaller the trade, the higher the percentage charged), with a minimum charge of £17.50. Meanwhile, buying or selling certificated shares, either by phone, internet or post, costs a minimum of £25.
Internet-only nominee account deals are the most competitive: for example, ShareCrazy at £9, Saga at £9.50, Hargreaves Lansdown (Vantage active trader) at £9.95 and Fyshe Horton Finney, iDealing and IMIWeb at £10. All these are flat charges, meaning you pay the same price whether you buy or sell £50 or £500,000 of shares, making them especially beneficial if you want to trade large volumes of stock.
UPSIDES AND DOWNSIDES
The main drawback of both nominee and Crest personal membership accounts is that extra charges can creep in. Many brokers charge administration fees for managing the account on your behalf. For instance, Barclays charges £9 for each quarter that the account is inactive, while TD Waterhouse charges an inactivity fee of £11.95 a quarter on its frequent trader account.
Additionally, there can be problems if you decide you want to move your nominee account to another broker. Paul Stallard, sales and marketing director with Fyshe Horton Finney, explains: “It’s easy to transfer, but it can cost you. Although it’s unlikely your new broker will charge you, the one you’re moving from will charge an average of £10 for every line of stock you hold.”
On the plus side, however, many brokers include extra services with nominee accounts. Emma Rees, a spokeswoman for Barclays Stockbrokers, says: “With Barclays’ nominee accounts you can set limit orders either online of by phone. This means that we will automatically buy or sell a particular share for you once it reaches the price you have specified.”
Some brokers also pay interest on cash you hold in your account. For instance, iDealing pays 2.75% on cash balances of £3,500, while TD Waterhouse pays up to 2.25% on balances over £50,000. Other brokers, including Halifax and HSBC, don’t allow cash to be held within the nominee account, but will instead link it to a bank account so any surplus cash is transferred there.
With the surge in online nominee trading over the recent years, corporate attitudes to shareholder perks are also changing. Rees says: “Increasingly companies are recognising that they can offer perks to the nominee shareholder. While they are becoming less common, if there’s something you particularly want, speak to your broker. They’ll know which companies allow this and can arrange for the perk to be passed on to you.”
IN SAFE HANDS
Opening an electronic account with a broker is fairly easy but, because of new money laundering regulations, requires more security checks than paper certificate trading. TD Waterhouse’s process is typical. Alison Cashmore explains: “Customers need to complete an application form and send it to us with two pieces of identification, such as a household bill and a driver’s license.” Factoring in postal time, you can expect to take about a week before your account is open and you can start trading, although you can speed up the process by taking your identification and application form into a branch of your chosen stockbroker. “Alternatively, customers can open an account and start trading immediately by making a £50 deposit using their debit card, as this enables us to use the banking checks to verify the person’s identity,” Cashmore adds.
The fact that the industry is heavily regulated makes the process convoluted, yet it does offer additional protection once you are trading. Placing your shares in someone else’s name through a nominee account, for example, may seem potentially dangerous, but there is protection in place to ensure you do not lose out. Stockbrokers are authorised by the Financial Services Authority, and you can check a broker’s authorisation either on the FSA website or by calling its consumer helpline on 0845 606 1234. Authorise brokers are also members of the Financial Services Compensation Scheme, which can pay out up to £48,000 if you suffer any losses as a result of the stockbroker’s negligence.
Contact the Sharecrazy Press Centre
Back to Press Centre List
