So you want to start investing. Who are you going to call? Watch films, read the financial press or look online and you will find no end of possibilities. You’ll hear about stockbrokers, money managers, private bankers, planners, wealth managers, financial advisers (IFAs)… but what do they all do and which is the one you need?
The truth is that there is significant crossover between the various roles – and the key decision you need to make is whether you want to make your own investing decisions, or have someone else make them for you. The former can be very cheap. The latter can be very expensive.
A stockbroker is an individual working at a brokerage firm. He buys and sells assets for either institutional or individual clients for either flat fees or a commission based on the value of the deal. For our purposes there are currently two types.
The first (and the type I suspect most MoneyWeek readers use) is execution-only. You tell them what to do and they do it. There is no advice given and fees should be low.
The second is an advisory stockbroker: you tell them what to buy and sell, but they offer advice along the way. Execution-only stockbrokers are now almost entirely online (think Hargreaves Lansdown and the like) and chosen on the basis of price, website design and perceived security. Look around our website and you will find articles explaining the best criteria to use to choose your online broker.
Brokers are referred to in the industry as being on the “sell side” – they make their money from other people trading.
Discretionary fund manager (DFM)
Also referred to as wealth managers and discretionary stockbrokers. You give them your money and the authority to manage it and they’ll take care of your portfolio for you. That may mean buying a selection of funds, or constructing a portfolio of individual shares. Either way, he’ll do the work and you just see the results (you should generally be able to keep track of your portfolio online too).
IFA (independent finacial adviser)
These are professional advisers who have to offer you the choice of paying for their services with a flat fee rather than a commission. Their advice should be independent and take into account your entire financial situation, as well as all the financial products on offer. They won’t just advise on investment, but can (and should) also look at tax, retirement planning, insurance, mortgages and so on. They will often pass your actual investments on to a DFM of some sort – they make a plan for you, the wealth manager executes much of it. Many IFAs now call themselves financial planners.
Effectively a premium IFA who also offers access to premium banking services. A family office does much the same thing for the very rich.
Only able to suggest certain products, providers or both. They might work with just one company or with a group of companies to recommend products, or they might sell only one type of product such as pensions or mortgages. Whatever the restriction, they must tell you about it before offering any advice, and they can’t be considered to be independent.
Effectively an online wealth manager. This is different to an online broker, in that your money will be managed automatically (the company makes the buy and sell decisions for you) with mostly passive investments (those that just track markets rather than try to outperform them).
The person actually responsible for making the investment decisions and for running any one collective investment fund. When you buy or sell investment funds from the likes of, say, Aberdeen or BlackRock, you are buying a share in the portfolio of assets that the manager has chosen. He will buy and sell the shares within the fund through an institutional stockbroker. You then buy the fund via a retail stockbroker. Fund managers are referred to in the industry as being on the “buy side” (they buy stocks via the stockbrokers).
The number crunchers who actually look at individual stocks, bonds and funds. They are responsible for telling the fund managers what they should or shouldn’t buy – and the stockbrokers what they should advise clients to buy and sell. You’ll find them both on the buy side and on the sell side.
An individual or firm that quotes bid and offer prices (buy and sell prices) for shares and listed securities of all kinds. He will hold an inventory of the stock, so acts as the principal in each trade rather than as an agent.