Small investors lose out as broker pool shrinks further

Stockbrokers being ordered to stop taking on new clients is not good news for small retail investors or aspiring investors who want to buy and sell shares at the lowest cost possible.

As the pool of brokers willing and able to take on small business at relatively low dealing charges shrinks, small investors are faced with paying more to buy and sell shares. And with new minimum levels of investment being imposed by several brokers, some small investors and potential investors could find it difficult to get into, or out of, the market. For small retail investors, the situation is unlikely to improve much before the Irish Stock Exchange introduces its long-awaited Xetra electronic trading system which is expected next month. This development is expected to entice some foreign brokers to offer their services in the Irish market and it will allow the existing Irish players to introduce online or Internet trading services.

At present capacity in the market is inadequate to handle the huge increase in the number of relatively small volume buying and selling deals, as demand for share dealing from retail investors mushrooms.

Since January the Central Bank has ordered two brokers not to take any new business. The brokers involved - Fexco and BCP - concentrate on the retail end of the market. Fexco, which offers an execution-only service - that is it will buy and sell shares for investors without getting involved in advising clients about investment strategy - has the lowest charges in the market.

While it is "business as usual" at both brokers for their existing clients, they can no longer deal in shares for people who are not already registered with them.

At the same time, the huge boom in the numbers of people who want to buy and sell shares has resulted in a decision by brokers Campbell O'Connor not to take on any new clients. A relatively small firm, Campbell O'Connor's dealing charges are at the lower end of the market.

Managing director Mr Brendan O'Connor explained: "We have got more than enough business to keep us very busy. It is a question of balance. Volume has increased dramatically with a lot of money that was sitting in bank accounts moving back into equities."

With its business volumes up more than 100 per cent, staff working hours increasing, and difficulties in finding experienced staff, the firm decided the answer was not to take on any new clients. "The alternative would have been to expand and since that would have meant moving premises, expanding systems and staff we would not be able to offer the cheaper commission levels," he said.

At Campbell O'Connor the commission charges per transaction are 1.5 per cent on the first £7,000, 0.55 per cent on the next £8,000 and 0.5 per cent on the remaining amount - there is a minimum charge of £20. So an investor buying, say, £16,000 worth of CRH shares would be charged £154. Stamp duty of 1 per cent on the purchase of all Irish shares would add another £160 to the cost of the deal.

At Fexco there is a minimum charge per trade of £12.50. Commission charges are 1 per cent on the first £5,000 and 0.35 per cent on the balance. A customer would be charged £88.50 on a £16,000 transaction.

BCP's charges are higher. There is a minimum charge of £35. Commission per transaction starts at 1.5 per cent for the first £15,000, 1 per cent for the next £15,000 and 0.5 per cent on the balance, giving a charge of £235 on a £16,000 transaction.

Retail investors can buy and sell shares through branches of AIB, Bank of Ireland and Ulster Bank which pass the business on to their stockbroking operations, Goodbody, Davy and NCB.

While this means that the service is available in virtually every town and there are no minimum investment levels, the charges are higher than at Fexco and Campbell O'Connor.

For small investors the charges are high because all of the banks charge commission of 1.65 per cent on the first £10,000 in each transaction. Minimum charges are higher too - £60 at Bank of Ireland and £40 at AIB and Ulster. On a £3,000 trade the charge would be £60 at Bank of Ireland, or 2 per cent, and £49.50 at AIB and Ulster. At Bank of Ireland, which has 290 branches in the Republic, the minimum charge per transaction is the greater of £60 or 1.65 per cent of the first £10,000 involved. The commission scale is 1.65 per cent on the first £10,000,

1 per cent on the next £10,000 and 0.5 per cent on the balance.

The charge for an investor buying £16,000 worth of, say, CRH shares, would be £225 plus stamp duty. There is no minimum investment required but the minimum charge would make dealing in small volumes very expensive.

In addition to clients who come through bank branches, the Bank of Ireland-owned Davy Stockbrokers has its own client base where there has been a huge rise in execution-only business, according to Mr Tony Garry. Year-on-year, the number of deals has doubled and the firm has taken on 60 new staff since the beginning of the year to cope with the rising volume, he said.

Investors can deal through AIB's 218 branches in the Republic which pass the business on to Goodbody. There are no minimum investment levels. Execution-only dealing charges per transaction, which are the same for direct clients of the stockbrokers, are 1.65 per cent on the first £10,000, 1 per cent on the next £20,000 and 0.5 per cent on the balance with a minimum charge of £40.

Purchasing a block of £16,000 of CRH shares would cost £225 plus stamp duty - the same charge as through the Bank of Ireland branch network.

While the charge would be the same at both banks for a deal of up to £20,000, on bigger deals, the customer would do better with Bank of Ireland. This is because while both banks charge 1.65 per cent on the first £10,000, the charging structure then changes. AIB charges the next £20,000 at 1 per cent before the charge falls to 0.5 per cent, whereas Bank of Ireland charges only £10,000 at 1 per cent before the charge falls 0.5 per cent.

So, on a £30,000 deal the charge through an AIB branch would be £365 whereas a Bank of Ireland branch charges £315. At Goodbody volumes have shot up over the last 12 months, driven by demand for US technology stocks. But there has been a slowdown since the beginning of April, according to Mr Tony McCarthy. "Market volatility has resulted in a realisation that the market is not a one-way street - it has brought more sobriety and, as a result, volumes are down."

Responding in recent months to pressures caused by rising volumes of business, Goodbody introduced a minimum investment limit of £50,000 for its own new clients. Mr McCarthy said the limit was temporary to protect the service to existing clients and was under constant review. At Ulster Bank branches the commission charges are higher than at the other banks with a charge of 1.65 per cent on the first £10,000, 1.25 per cent on the next £10,000 and 0.75 per cent on the balance. On a £16,000 trade the charge would be £240. At Dolmen Butler Briscoe managing director, Mr Paul McGowan, said there is no minimum level of investment but he said that his charge structure is aimed at discouraging people making small investments for short periods.

"Our commission levels are a bit higher to encourage people to put bigger amounts in so that they can buy for capital appreciation," says Mr McGowan.

"We are an advisory broker. We don't just buy and sell. Investors need to plan what they are trying to do. The stock exchange is not a casino," he explained.

Dolmen has a minimum charge of £50 plus an administration charge of £10. Its commission charges scale starts at 1.65 per cent on the first £10,000, 1 per cent on the next £10,000 and 0.5 per cent on the balance. Complicating the issue are other costs of dealing such as charges for dealing in paper (share certificates as opposed to having ownership of shares registered electronically) and third party charges where European or US stocks are bought. These vary from broker to broker.

While the arrival of foreign competition and a more cost-effective electronic trading platform should eventually bring down the cost of execution-only share dealing for retail investors, one broker suggested that for now the rules of economics apply:

"Where demand is greater than supply you will not see prices fall - if anything they are likely to rise."