It was comedian Woody Allen who said a stockbroker was "someone who invested your money for you until it was all gone". Clearly, the stockbroker Allen had in mind must be avoided. One should even hope he or she has already gone out of business.
Such cynicism about the stockbroking fraternity must be rife among investors who have seen their wealth eroded by the financial maelstrom of the past 18 months. It may explain - at least in part - why there has been a rapid growth in online investing through an execution-only type of broker.
"A lot of people are looking to take more control of their own investments," says Rebecca O'Keeffe, head of investments at online broker Interactive Investor. "They have been saying to themselves: if I am going to lose 30 per cent of my money I might as well do it myself rather than pay someone else to do it for me."
Not everyone takes that view, of course. Killik & Co is a firm of stockbrokers formatted very much on traditional lines to provide a personal advisory service to clients from the day they first walk through the door. Hannah Edwards, private client manager with Killik's client team, thinks "the uncharted territory we have been in over the past 18 months means people want more of a hand-holding operation that only an advisory broker can provide".
The London Stock Exchange (LSE) supplies a comprehensive list of brokers on its website. It divides them neatly into four types.
1. Execution-only brokers: they offer no advice but simply trade on the client's instructions.
2. Advisory brokers: they provide that extra advice dimension while carrying out the client's trading instructions.
3. Discretionary brokers: they buy and sell shares on behalf of the client, but also have the authority to make investment decisions without the client's approval.
4. A fourth category provides direct market access, enabling very active investors to deal directly with other market participants.
Of course, in the real world this neat pigeon-holing does not really apply. Many brokers now cover the waterfront, offering all four services under one roof. "Lots of our clients run different portfolios with different strategies," explains Killik's Edwards. "We have clients who run their pension money on a discretionary basis, their ISA share portfolio on an advisory basis and use an execution-only approach for an active share trading account."
The Association of Private Client Investment Managers and Stockbrokers (Apcims), which represents more than 200 firms, offers a useful Find a Firm filtering service on its website. You tick boxes to indicate what sort of an investor you are and it produces a refined list of broking firms for you to choose from.
No-frills/no-advice online broking is growing very rapidly. It is part and parcel of the internet age with younger investors, who are as willing to adopt this approach to investing as they are to download music or to buy and sell a car or a bike on eBay.
And while online trading is theoretically advice-free stockbroking, the internet itself is a rich source of information and advice. An online broker such as the Share Centre, for instance, has share tips and funds advice and a certain amount of research material to provide the investor with back-up when going it alone.
David Bennett, chief executive officer of Apcims, says: "Some of our members have reported a 50% increase in online activity in the April to June quarter compared with the same quarter a year ago."
According to a survey by ComPeer, the securities industry analysts group, some 3.5 million of the 5.7 million trades by UK retail stockbrokers in the second quarter were by execution-only firms and more than 80% of their trades were online.
If the younger generation have warmed to internet trading, older investors are more cautious. But even they can be attracted by this low-cost method of investing. Whereas Paul Killik claims his advisory firm's minimum commission of £30 is "accessible and unintimidating", the online broking fraternity has been charging dealing commissions of £10 or less.
The climate may be hotly competitive but comparing charges can be something of a minefield. Different charges are levied, in many cases depending on how large the trade is and how frequently you trade. There may be administration fees or management fees on top.
Frequent trader rates
Hargreaves Lansdown's dealing commission ranges from £9.95 to £29.95 per trade online, but between £15 and £50 if you deal on the phone. TD Waterhouse, which claims to be the UK's second largest online broker, matches the Hargreaves charge of £9.95, but you have to be a frequent trader to get that rate and that means trading more than 10 times every quarter.
Trade less often and the charge goes up to £12.50. If you use the phone you pay £19.95.
However, other firms only offer a frequent trader rate if you trade much more frequently than is the case at TD Waterhouse. Waterhouse claims its particular appeal is its ready access to the shares of 16 overseas markets for exactly the same trading charges as for UK shares.
Interactive Investor appears to offer the most straightforward tariff. It is a £10 flat fee on all trades. "We want transparent pricing more than anything else," says Interactive's O'Keeffe. "We have no management fees, inactivity fees, Isa fees or other hidden costs."
Dealing solely with the minutiae of costs of dealing brings the danger of missing the point of having a stockbroker in the first place. In any case, achieving the cheapest deal and an efficient settlement process may prove equally important.
Justin Urquhart Stewart worked for Barclays Stockbrokers for 20 years before he set up Seven Investment Management with Tom Sheriden in 2002. He reminds us what stockbrokers are really for. "The biggest question we all need to know the answer to is: how much is enough?" he says. "In other words: when can I retire and know that the money won't run out before I die?"
He complains that nobody ever answers this key question. "We have got to get people to forget about the financial version of the nag running in the 2.30 at Newbury and to think about their long-term plans," he insists. "I have no objection to people having a punt, but it is important not to mix this up with long-term wealth building."
At Hargreaves Lansdown - although it is an execution-only broker - there are also financial planners to help clients decide what sort of investor they want to be and what their investment priorities are. Marketing manager Duncan Jeffrey says: "There is an initial free consultation and then any advisory investment service is based on funds rather than on individual shares."
Fees are charged annually on a sliding scale for this service: 3% for the first £150,000 down to 1% on the margin above £400,000.
His investment colleague Keith Bowman explains: "Our core offering is our selection of about 150 funds filtered down from thousands of funds. We think that is a good basis for many of our clients to build an investment portfolio."
Building long-term wealth
Urquhart Stewart suspects that the traditional stockbroker is often not the best place to go to build long-term wealth. "I am becoming increasingly sceptical about the portfolios of investments I get to see from traditional stockbrokers or from private banks," he says. 'They seem to be 80% in equities and most of it in the UK.
"What you need is a more balanced range of different assets - only part of which will be shares - and punting will only be a small part of the portfolio. The first thing you do is the asset allocation and the last thing you do is to pick the stock or fund."
He argues it is time the stockbroking fraternity moved away from just recommending stocks: "They need to start applying broad asset allocation around the globe across other asset classes to provide institutional calibre investment services to the retail market."
Of course, a number of broking firms have moved in this direction already. Stockbroker Brewin Dolphin - with some £16 billion of private client money under its wing - is now the largest independent private client investment manager in the UK.
Private investors might be forgiven for thinking that they could get lost within such a large organisation and might not receive the kind of personal service they are looking for. But even Brewin has a network of about 40 branches nationwide, providing clients with a more personalised approach.
Rathbone Investment Management is similar to Brewin with about £10 billion under management, but is also anxious to develop bespoke personal investment plans for each individual.
Certainly, if you are seeking a stockbroker to build wealth over the long term then you probably need to be sure that there is some real continuity in the advice you are receiving. Hannah Edwards argues that an independent firm such as Killik, which is not part of some big banking conglomerate, is "permanently client-focused because we all have a vested interest in the business".
The result has been, she claims, a very high client retention rate. "New people are coming in all the time," she says. "Not many are leaving."
But do these sizeable independent firms welcome the genuinely small 'wet-behind-the-ears' investor? Killik, for one, has never imposed a minimum portfolio investment requirement. "We want to attract the young guys and girls in their 20s who are getting into their first equity ISA," says Edwards.
At Seven Investment Management, Urquhart Stewart has been anxious to get away from the notion of stockbrokers' treatment of their clients "depending on how much commission they could earn out of them".
He believes the same investment discipline should apply to someone who has a thousand pounds as to someone who has a quarter of a million pounds. "My godchildren will have little portfolios that look virtually identical to what is in my own pension fund," he says.
The rapid growth of online trading suggests many people are confident that they can manage their own money without the help of so-called experts - or at least, that they do not consider that the professional advisory services justify the additional costs. But the fear is that they lack a coherent long-term wealth-building plan that the bespoke personal service offered by advisory brokers could provide.
"Though the internet the private investor has access to so much information that an awful lot of people are looking to take the initiative themselves," says Interactive Investor's O'Keeffe.
It is a trend that has potential dangers, but it looks unstoppable.
This article was originally published in Money Observer - Moneywise's sister publication - in September 2009