Although stockbrokers bring equity expertise and can add value, many financial advisers view them as just another layer of cost
With increased UK regulation and changes to capital adequacy requirements leaving intermediaries more accountable for the advice they give, many have opted to outsource this service to stockbrokers. There has been a trend for advisers to use them for international investment bonds especially for clients who wish to invest directly in equities and mitigate potential IHT liabilities.
Although most intermediaries would agree a stockbroker would add the most value when choosing individual stocks, most see it is still their role to help clients choose funds and believe this could add an extra layer of fees for investors.
According to Richard Leeson, international relationship manager at Prudential International, there has been a growing trend for advisers to use stockbrokers to manage clients' money since the UK government undertook a review of the retail savings industry in July 2002 (Sandler report). The report outlined the necessity for an adviser to clear information to clients choosing investment products.
Charlotte Black, marketing director at stock broking company Brewin Dolphin, also believes the Sandler report has made intermediariesmore cautious about their recommendations. She says: "It put more onerous activities on intermediaries. They now have to monitor and review the investment performance of funds, as well as give regular feedback to the clients and justify all investment decisions. It has forced some intermediaries to outsource the administration, custody as well as investment advice."
Another reason why intermediaries use stockbrokers, Black explains, is the increasing cost of capital adequacy requirements.
For example, if an intermediary only acts as an introducer, the capital adequacy requirement is £10,000, whereas if investment advice is given, then a capital requirementof 25% of the overall cost of running a business is needed. She says professional indemnity insurance has also increased by 50% over the last few years.
Leeson says: "A number of intermediaries have been looking at stockbrokers to manage a client's assets as it removes their liability. Advisers have been changing their business model as a result and now the decision-making process involves the client, the intermediary and the stockbroker all sitting down together to choose what investment approach to take.
"The stockbroker will help pick the funds and put together a detailed investment proposition as well as undertake market monitoring and online valuations. The intermediary will still have access to fund management and will act more as an informed expert for the client on the performance of their portfolio. Essentially, the intermediary acts as a go-between for the stockbroker and the client and deals with all their telephone calls and enquiries."
At Brewin Dolphin the company has contact with both the clients and the intermediary, although the client can choose to either communicate with the adviser or work directly with Brewins.
It also has a non-competition agreement with intermediaries to establish what services the stockbroker and adviser offer to the client. She says referrals are not only made by IFAs, but accountants and solicitors working in financial services.
tax free growth
One area where stockbrokers Brewin Dolphin and Williams de Broe have seen an increase in the number of intermediary referrals is international investment bonds as it can be used to mitigate IHT.
Canada Life and Royal Skandia both offer wrappers for Williams de Broe, which can be used for clients who want the benefits of an offshore bond such as mitigation of IHT. Williams de Broe manages the underlying assets of these wrappers, which can include direct investment in equities.
Mark Stevens, head of private clients at Williams de Broe, believes stockbrokers who offer direct exposure to equities or individual shares, which can then be placed in an international bond and trust wrapper, have a competitive advantage over those who do not.
"Stockbrokers understand the timing of deals and have an idea of when a stock may be strengthening or weakening. High-net-worth individuals with lump sums of more than £100,000 not only want funds but individual shares in their portfolio," he says.
Leeson also says intermediaries that work with stockbrokers can negotiate greater discounts on funds as they usually manage more money. It is for this reason that Prudential is looking to tie-up with stockbrokers and move custodianship of the assets to firms that actively manage money.
He says: "Stockbrokers have the added advantage of being able to cut costs with fund groups, because they deal with larger volumes of money compared to advisers. These discounts can be as much as 15% to 20% on the overall costs. Management fees for stockbrokers are less for larger sums of money and start at 1%, whereas the adviser gets remunerated by charging a notional annual fee or by taking commission."
the search for value
Black explains that the cost of using a stockbroker can vary depending on the volume of business, but generally the management fee is divided equally between the stockbroker and the adviser.
Peter McGahan, managing director at Worldwide Financial Planning, adds: "Many advisers have accepted products are no longer solutions. With-profits and managed funds continue to struggle to add any real value over an index and as such are turning to new ideas to see where value can be added. Understanding funds is a complex subject and advisers will continue to outsource this if they do not have the appropriate skills.
"Multi-managers are one option but some may see the stockbroker option as a cheaper way of accessing outside management."
McGahan is not so sure when it comes to offshore bonds. He thinks it can create an additional layer of fees which may drag down the returns from the underlying investment. He comments: "Straight broking services are cheaper than a collective agreement, but when an intermediary uses a product, such as an offshore bond, and then a broker for management, there is a double charge. For example, 0.5% for the wrapper plus an annual management fee and a charge for the broker within the contract for managing it. The latter two might each be 0.5%. Everyone gets paid; the broker gets the wrap if the product does not do well and the intermediary takes the applaud for choosing the right broker if it goes up."
Despite the risk associated with investment advice and the capital adequacy requirements, Anna Bowes, investment manager at IFA Chase de Vere Financial Solutions, believes there is a long way to go before advisers would use this service daily.
According to Bowes, the only difference between stockbrokers and advisers is that while the former look at individual shares, the latter look more towards funds.
Increase in regulation has caused some advisers to outsource investment management to stockbrokers
Stockbrokers can add the most value when clients want to invest in direct equities
Advisers warn that using stockbrokers to choose funds may add an extra layer of fees to clients
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