Foresight Capital Partners

My preferred UK brokers are:

• iDealing.com – Only retail DMA provider, covers all Crest settled securities.
• TD Waterhouse – No DMA, good source of liquidity for non-Crest securities, allow up to 20 days to settle trades, international stocks, and good interest rates of cleared funds (presently over 5%)

Which together offer a comprehensive brokerage solution for the UK based investor.

iDealing.com

iDealing.com offers a transparent Direct Market Access brokerage service that includes the possibility to place contingent orders for a fixed fee of 10 GBP per trade for trades up to 10,000 GBP, and 0.1% thereafter. Brokerage fee discounts of up to 25% can be obtained when buying credit in advance. If you trade Crest settled securities (covering almost everything) then iDealing.com in terms of quality of execution, and over-all cost is the clear leader in the UK.

The infrastructure is very functional and as a user I really like the Dealer Dashboard where I can simultaneously view my holdings P&L, my watch list all with streaming bid-offer quotes and cash balances on the same screen. Trades are entered by just clicking on the bid or offer quote and then entering the transaction details.

The disadvantages of iDealing.com service are:

• No support for non-Crest settled securities: For the majority of investors this is irrelevant since such securities are now very rare.
• Not the best Interest Rates: In an ideal world, iDealing’s interest rates could be a little higher (at present they are 2.7% + a bonus of 0.65% for 50K GBP cash holdings).
• No BACS transfers through electronic interface: They could offer an electronic interface to send BACS transfers to a designated UK bank account (rather than needing to complete a form that needs to be faxed or posted).

TD Waterhouse

TD Waterhouse allows trading in non-Crest settled securities, overseas listed securities, has an excellent interest rate (at present, over 5%), and allows 20 days in order to settle trades. For UK residents the TD Waterhouse service is also available (with slightly higher charges and lower interest rates) through a Natwest Stockbrokers branded service. Hence, if you like a familiar brand and the possibility to quiz your local bank manger if anything goes wrong then you could consider taking this route.

A TD Waterhouse account can be closely integrated with any UK bank account through direct debit, which is very convenient particularly for income seeking investors. Also by allowing 20 days to settle purchases means that you can earn interest for 17 more days over the usual 3 days settlement while still participating in the growth in the asset you have purchased.

The only real disadvantage of TD Waterhouse is that it does not provide direct market access (DMA) to the SETS, SETSmm electronic order books.

The introduction of electronic order books (see Direct Market Access (DMA) on the LSE) for many of the LSE stocks means that for those stocks on an order book the broker(s) who offer by far the best QoE will be those who offer DMA to the order books themselves. At present, the only retail discount broker offering this service is iDealing.com, and for those for which quality of execution on (for example) FTSE 350 stocks is the key criteria iDealing.com will always be the natural choice. Note that the LSE has indicated that eventually all Crest settled securities will be traded on an electronic order book. It is also important to point out that the regulation of DMA brokers requires that their customers be deemed to have sufficient experience and expertise to be classified as “intermediate customers”.

For Crest settled securities which are not (at present) on an electronic order book then all the major brokers will very much perform similarly with regard to QoE. Most brokers will typically trade within the indicative spread by polling Retail Service Providers (RSP) who offer liquidity off the order book. In terms of particular brokers, I would suggest iDealing.com, TD Waterhouse, SelfTrade.com, and Barclays as offering a good service with pretty much a similar QoE.

For non-crest settled securities (which will never be available on an electronic order book) then I would suggest using TD Waterhouse, which aggregates liquidity from a number of sources including in-house client-client, broker liquidity pools. The trading of such securities is highly illiquid and obtaining liquidity at the indicative market spread will be the key consideration. In fact, because of the additional costs involved in offering non-Crest securities the (electronic) broker’s iDealing.com and SelfTrade.com do not offer trading is such assets.

When selecting a broker there are a number of criteria to take into account. An appropriate broker should offer all the services you need, be cost effective and offer complete peace of mind in terms of reliability and service levels.

Key Variables

The key variables (in my mind) in the selection of a brokerage service are:

1. Quality of Execution – The ability of the brokerage to obtain the best volume adjusted price within the relevant markets.
2. Charges – Though the ‘quality of execution’ will generally be by far the largest cost, dealing charges are generally the second highest cost.
3. Interest Rates/Charges – The interest paid of cleared funds and if relevant the charging costs of any gearing.
4. Coverage – Crest/Non-Crest, International coverage, range of instruments (warrants, CFDs).
5. Infrastructure – Trading platform, Settlement (Direct Debit, T+3-25, trading credit), banking services, ease of funding/withdraws, reporting.
6. Support – Online and/or telephone based support, reporting/statements/records.

Researching Providers

Comparison charts and reviews are available at the follow sites:

• BlueSky Ratings
• Motley Fools Broker Comparison

Another good source of information in this topic will be discussion boards such as Motley Fool’s Brokers board at http://boards.fool.co.uk/Messages.asp?bid=50070, where you can discover the experiences of other investors with various brokers.

Testing a Provider

With any financial service provider, I tend to start to asking 20 questions to the front line support staff and seeing if I get 20 reasonable answers back. Remember, if anything goes wrong you will be dependant on these parties fixing the problem before you can get on with your investment activities. If you are happy with the staff then I would proceed with testing the account, by either using a demo account or opening an account depositing a nominal amount of funds and trying out a few trades. Only after a month or two, when the account has behaved well, the reporting has been clear and comprehensive, would I consider moving forward.

Brokers I do and have used

Over the year’s I have used the following brokerage service providers:

iDealing.com, TD Waterhouse, SelfTrade.com, Cater Allen, Barclay’s Stockbrokers

All of which with the exception of Cater Allen (my first broker in the mid-90s) are still in operation today. At present, my primary brokerage providers are iDealing.com and TD Waterhouse, which together offer me, for my needs a comprehensive and cost effective solution.

In the post Third Part Effects I detailed now the sub-prime mortgage problems experienced in the US may fall over to effect other sectors of the economy and I would be looked out for such effects.

It now seems that such fall over is taking place in the US economy. Yesterday, General Motors’ Vice-Chairman Bob Lutz reported that “The [car] market as a whole has been a little weakfish. That has come as a result of the housing market problems and the mortgage industry meltdown”. In addition, to such third party effects showing up in the real economy, it is also leading to distress of financial assets. For example, Lehman Brothers used Riverside County mortgages loans as collateral for $1.5 billion of bonds sold in January 2006. Over the past year, Riverside County, California, the foreclosures have almost tripled and the lowest-rated portions of the securities now trade at 63 cents on the dollar, down from more than 100 cents in October, according to data compiled by Merrill Lynch.

With today’s data showing that new house sales plunged 8.4% in March, the biggest drop since Jan. 1989, to 6.12m, against a consensus of 6.45m, with median sales prices falling 0.3% year/year. The third party effects are only likely to become even more pronounced. Moreover, after browsing through property listing sites the rental yields available on property is still generally under 5.25% (short term interest rates) which to me implies that prices are likely to weaken further with respect to inflation. Placing additionally pressure on the underlying market which most likely will lead to further third party effects.

Yesterday morning I read through the letter written by the Head of the Bank of England (BOE) Mervyn King to the Chancellor of the Treasury Gordon Brown, and its subsequent reply. Over the past ten years the independent BOE has performed very well at its principle role of keeping inflation (and deflation) in check. However, the latest CPI report triggered an open letter when the Consumer Price inflation (CPI) moved above 3% and the BOE in essence failed in its mandate to keep CPI close to 2% (which is deemed to be within the 1-3% band). These letters though being the first of there type surprised me in the following manner:

1. The Governor failed to take full responsibility for the fact that the banks interest rate policy decisions and the banks other monetary mechanisms failed to control inflation to the required degree (see Blame me Consultant post).
2. The tone of the letter was much too chummy when the content of the letter was to report of the bank failings. The consequences of inflation when it really takes hold are dire and the treatment (namely rigid control of monetary growth e.g. 1981-1983) is painful, and the tone just failed to reflect this.
3. The letters where clearly designed for external consumption. Though the chancellor and government are by default ‘cheer-leaders’ of the economy and the modus operandi they could at least be a little more subtle.

The open-letter condition within the BOE mandate ensured over-sight and allowed the BOE to reassure the public when the monetary policy path taken failed. However, the letters exchanged yesterday just failed to do either and leaves me with the impression that neither party takes the situation very seriously.

Source: Copies of the BOE letter and its reply are available from:

http://www.bankofengland.co.uk/publications/news/2007/044.htm

The financial services industry (particularly fund management) is essentially a marketing operation. Because marketing is such a key aspect of such business they pay relativity high levels of reseller commissions. Whether you are buying a mortgage, taking out a loan and credit, you can (almost certainly) be assured that the person selling you the product will receive a sales commission for doing so. The sales commission on a mortgage will typically range between 400-1,000 GBP (depending on the type and size of mortgage). However, as is the case within unit trusts some brokers (see below) are more than happy to share their sale commission with the customer.

For (partial) sales commission refund on Mortgages see:

http://Mortgagegenie.co.uk (Good online tool for comparing total costs of mortgages)
http://Moneybackmortgages.com

For other financial products (loans, credit cards) see:

http://www.greasypalm.co.uk
http://www.quidco.com
http://www.rpoints.com

For more details concerning this topic and numerous other money saving ideas see:

http://www.moneysavingexpert.com/

after all a dollar saved is a dollar earned.

A managed account is owned by an individual and run by a third party investment manager. Since managed accounts are personalized investment portfolios they can be tailored to specific needs (tax, risk profile, income level etc) of the account holder. Since a managed account is always owned by an individual they offer complete security and access. Managed accounts are also offer high levels of transparency in terms of investment approach and complete transparency in terms of costs (such as brokerage fees) incurred by the account.

These features offer clear advantages over Pooled Investments such as Unit Trusts and Investments Trusts where the assets will be held by a custodian appointed by the fund manager. Moreover, transparency of investment approach and the costs can be difficult if not impossible to discern from the published materials.

A managed account set-up can be as simple as having a brokerage account where a third party Power of Attorney mandate to empower an Investment manager to operate the account on your behalf has been established. Alternatively you may wish to set up a company or trust structure (onshore or offshore) which holds the assets, in order to allow a family managed account and/or tax planning.