Smaller brokers may pay the highest price for Taylor affair

THE main players in the investment business are now set to capitalise on the fall out from the Taylor affair, as nervous investors seek a blue chip home for their funds.

Privately, some of the bigger stockbrokers see a silver lining in the cloud now hanging over the industry. Many are speculating that millions could be switched from smaller insurance brokers and financial advisers into the bigger stockbrokers.

The smaller financial brokers are in a difficult position. They are unlikely to see much new money pouring through their doors - at least in the short term. The sight of elderly investors losing their life savings is likely to prove a stark reminder of the danger of trusting anyone to keep your money safely.

Although Taylor's disappearance is only the latest in a line of investment frauds, it is likely to have a major impact on investor confidence. The Taylor group was one of the largest managers of funds outside the main financial institutions. Tony Taylor also had a high personal profile, as founding president of the Irish Brokers' Association. Investors would have felt safe putting their money with one of the biggest and longest established names in the business, who operated from plush headquarters on Dublin's Clyde Road.

As a result many investors will now be tempted to go through the big three bank owned stockbrokers. A guarantee of the backing of the likes of AIB or Bank of Ireland, as well as assurances that the Central Bank audits and regulates the stock brokers that deal on the Stock Exchange, will now count for a lot with investors.

Mr John Kielty, head of private clients at NCB Stockbrokers which is owned by Ulster Bank, said he has already received a number of enquiries from investors looking for a home for their funds.

"These investors are looking for peace of mind," he said. "Performance is an issue but if the underlying assets are at risk, it becomes less of a concern.

A big selling point for the big institutions and their offshoots is the guarantee which goes with their financial clout. "AIB or Bank of Ireland is not going to stand back and callow anything to happen which damages their standing," one broker said. "And that is a very powerful selling tool."

But would an industry dominated by a few major players be in the best interest of consumers? Many in the industry point out that a thriving independent sector, including a variety of insurance brokers and independent financial advisers, is in the interest of all. Many intermediaries are excellent and add to consumer choice, a spokesman for Goodbody, one of the big stockbrokers, pointed out.

"There is a danger that they will all be tarred with the same brush," Mr Kielty said. "There are many excellent brokers out there, who will suffer regardless."

Of course, some people who are keen to avoid the taxman are inclined to use smaller brokers or other advisers to handle their funds.

"There is no way the big institutions can condone tax evasion," one stockbroker said. "We have to send a list of everyone who has opened offshore accounts to the Revenue every year. That is not always the case with some independents."

Nevertheless there are many small brokers up and down the country who provide a very valuable service to their clients. Mr Ross Barry, managing director of Barry Ross and Associates, in Dublin, says many of his clients appreciate the personal service he can provide. "The big institutions do not always have the time to provide a truly personal service. That is what many of my clients appreciate.

I always tell my clients that if it sounds too good to be true it probably isn't. On top of that it is a mistake to give a broker discretion over your funds.

"Even if you discount fraud, it is too easy for a broker to turn over accounts (switch them from one investment to another) to generate commission, if times are hard. I also always make sure that my clients make out all cheques to the institution which gives some assurance and they hold the policy documents."

Nevertheless, Mr Ross believes the fall out from the Taylor affair will be enormous, particularly for independent brokers. "It has definitely got to the stage where we need a compensation fund, even if it has to be funded through a levy," he added.

But this does not meet with universal approval. The larger stockbrokers insist that they would simply end up paying for the rest of the industry. "If we are regulated by the Central Bank and can afford to compensate ourselves, why should we pay through the nose for others?" one broker asked.

He also pointed out that while it might sound logical for the Central Bank to regulate all brokers, it is simply not practical, given that their are hundreds of small operators across the State.

On top of that, "regulated by the Central Bank" on letterheads could add a degree or respectability not necessarily present, he added. The bank has long resisted taking on the primary regulatory role for the sector.

One answer could be for the auditors to take on greater responsibility. "Requiring the auditors to take on greater responsibility as well as doing six monthly checks could be the most effective way of tightening up on regulation," one market insider suggested. Another route would be to set up a new independent statutory regulator.

All these issues must now be weighed not only by the Department of Enterprise and Employment - the official body charged with overseeing the sector - but also by the industry itself. For if the smaller brokers and advisers cannot rebuild investor confidence, then business will gradually drift away to the bigger players.