Money: Advisers may be very good but sometimes it; makes sense to go for broker

More and more of us inherit sums of money, receive redundancy, or are given a cash payment at retirement. Those seeking investment advice will often choose between independent financial advisers (IFAs) and stockbrokers. But how do their services compare, and what is the price of their investment advice? Iain Morse looks at the options.

One place to start is with the regulatory framework. That is because the rules that govern how you are advised are at present the preserve of several organisations, which have different starting points. This confusing system is being replaced with a super-watchdog, the Financial Services Authority.

It replaces the Securities and Investments Board and its assorted self- regulatory appendages, the Personal Investment Authority (PIA), Investment Management Regulatory Authority (Imro) and Securities and Futures Authority (SFA).

It is not yet completely clear how those functions will be merged. What is likely is that for the moment at least, the assumptions of how various financial services companies should relate to your needs may be based on their prior membership of the organisations mentioned above.

What are the relationships between membership of a regulator and the client?

The PIA regulates firms advising on and selling retail financial products to the public. That includes all independent advisers. Imro's primary focus is on the regulation of firms managing collective investments, an important category including unit trusts, investment trusts, life company funds, and pension funds. The SFA regulates market makers in shares, unit trusts, gifts, futures and derivatives. That includes nearly all stockbrokers.

The PIA allow business to be conducted on one of two bases. Firstly you can buy or sell on an "execution only" basis. That means you instruct but receive no advice. If things go wrong, there is no right of complaint. Secondly, you can take "best advice", which depends on disclosing your circumstances to the adviser.

In practice, "best advice" has two levels of meaning. There are general criteria matching principles of advice to particular circumstances. Next, there is product selection, usually from a list endorsed by the firm in question.

SFA-regulated firms offer "execution only" dealing, but will also act on either an "advisory" or "discretionary" basis.

With an advisory service, you receive recommendations to buy or sell, but must take the decision yourself. If you choose a discretionary service, you give the broker legal authority to do so on your behalf.

Unlike PIA-regulated advisers, stockbrokers do not need to justify their advisory or discretionary services by knowing your overall circumstances, but will want clear agreement over investment objectives, and attitudes to risk. Some also offer the wider financial planning services available from IFAs.

One obvious difference between IFAs and stockbrokers lies in the way they are paid for their services. The pre-packaged investments sold by IFAs will pay an up-front commission to the adviser, and perhaps also a "trail" commission over the period in which it is held. Both will be percentages of the amount invested or continuing under management. So for instance, a PEP investment of pounds 6,000 might pay 3 per cent up-front commission of pounds 180, with trail commission of 0.5 per cent per year.

That commission comes out of the bid/offer spread, or difference between the price at which you buy into those collective funds and at which you can sell them back to the fund managers. IFAs are now obliged to disclose the full amount of commission they receive in a "key features" document which shows the impact of charges on projected rates of growth of the investment.

Bryan Johnstone, a director of the stockbroker Bell Lawrie, argues: "An IFA would have to be saintly not to be influenced by the amount they receive from the companies whose products they sell. By contrast, you pay the stockbroker for what he does on your behalf."

But that could sound like a case of the pot calling the kettle black. Most stockbrokers managing discretionary portfolios of between pounds 50,000 and pounds 100,000 put the money into a range of unit and investment trusts. A typical charge for a discretionary portfolio is 1 per cent of fund value, in addition to the underlying fund management charges of the product itself. Commission received on unit trust purchases may or may not be rebated.

"Brokers tend to put smaller portfolios into these collective investments as a means of reducing risk," Mr Johnstone says. "For most private investors, risk means volatility in their portfolio valuation rather than the possibility of any absolute loss in its value."

There may be more to the matter than that. Since Big Bang, the 1987 deregulation of financial markets, price fixing among brokers has been illegal. In the days before deregulation, brokers large and small charged the same rates regardless of their overheads.

Jeffrey Turner of the Association of Private Client Investment Managers and Stockbrokers (APCIMS) thinks that has affected advice given. "A City broker will put smaller portfolios into collective investments while you may find a regional broker investing the same into a range of individual shares."

So both stockbrokers and IFAs are likely to sell the same types of product to the majority of private investors. "There is a growing similarity in the service and product range offered by good IFAs and private client stockbrokers," Mr Johnstone says. "The key to making a choice about whose advice you take is to establish how well they research the investments they recommend."

APCIMS, The Association of Private Client Investment Managers and Stockbrokers, is on 0171 247 7080. It provides a free list of stockbrokers and their services.