Employing the services of a stockbroker will have a significant impact on your finances, so take the trouble to find someone who suits your requirements.
We spend our lives making choices, some are very mundane and others are of vital importance, with much resting on the decision taken. Many of the consequential decisions we have to make centre on the issue of money and savings. The choice of which bank, short-term insurance company, life assurer, medical scheme, financial adviser and stockbroker to use can have a significant impact upon our financial well being.
Having decided that you require a stockbroker, a major decision in itself, the task of finding one is not difficult, but it does require that you exercise your mind. It is not a simple question and one size certainly does not fit all.
Sadly, in this age of technology and intricate regulations, the cost of operating accounts is far higher than the average investor appreciates and very few brokers are interested in small accounts.
The bad news is that small accounts are probably anything under R400 000 and these investors are encouraged to look at unit trust funds, or the online stockbroking alternatives, as they are the most cost-effective avenues open to them.
So, if you are not in the R400 000-plus league, you are probably not going to find a stockbroker, and if you do, your account will be one with limited services. The highly qualified and successful brokers usually look for accounts in excess of R5 million in investible income.
There are, typically, three kinds of stockbrokers. The first is the "execution-only" specialist. They deal with clients who know their minds and who just want a little advice when deciding what and whether to buy or sell. Then there is the "advisory" professional. This broker takes a more active role in looking after your account and will be proactive in contacting you with investment recommendations. Finally, there is the "discretionary" practitioner. This broker has carte blanche to manage your account in terms of the mandate you have selected.
Before you go in search of a stockbroker, you need to determine what exactly you want. If you are retired, looking for a balanced portfolio with capital and income growth over the medium term, and you wish to be actively involved in the investment process, you need an execution or advisory account.
If you are retiring and have capital to invest that must provide you with an income for the rest of your life and you are not interested in participating in the management of the portfolio, you are looking for a discretionary account.
There is clearly a vast range of requirements in between the execution or advisory broker and the discretionary broker, and it is essential that you are absolutely clear about what you want. It is also important that the investments you wish to make via your stockbroker fit in with your overall financial objectives and your other investments.
In determining your stockbroking requirements, you must also consider your annuities, savings accounts, unit trusts, offshore investments and possible tax consequences.
With the rigours that the Financial Intelligence Centre Act and the Financial Advisory and Intermediary Services Act have placed on the investing community, the requirements for opening an account are now far more demanding. You will need to spend an hour or so with the broker of your choice in the initial interview, opening the account and explaining your objectives.
You must understand that you cannot have everything. An account seeking high income will obviously not enjoy the same level of growth as a high-growth portfolio, which will typically receive a relatively low income. The other important point to bear in mind is that shares are considered to be a long-term investment and the performance must be viewed in this context. While you can mix and match to some extent, you cannot butter your bread on both sides - expectations must be realistic.
Now that you are ready to appoint a stockbroker, there are a number of ways to go about it. You may have a friend or colleague who has a broker and gives you an introduction. You could also discuss the matter with your attorney, accountant or tax adviser and they may point you in the right direction. Alternatively, you can approach the JSE for a list of all the stockbrokers who are members of the exchange.
The most important thing is that you find a person with whom you feel comfortable; somebody to whom you relate and who has time to listen to you and respond positively to your needs. This is as important as the qualifications of the person you select.
Suitable qualifications
The broker needs to be suitably qualified and ideally employed by a major financial services company, providing you with peace of mind that your assets are safe.
What does "suitably qualified" mean? To be a practicing stockbroker in South Africa you must complete the course offered by the University of the Witwatersrand that entitles you to membership of the South African Institute of Stockbrokers.
There are, however, many practitioners who call themselves stockbrokers and who do not have this qualification. Some simply work in a stockbroking office and, having done so for many years, feel entitled to call themselves a stockbroker due to practical experience gained on the job. Others feel they have qualifications far in excess of what were known in the old days as the JSE membership exams. These qualifications could include a Bachelor of Commerce, a Bachelor of Business Science or of Arts with economics and accounting as majors, or some other tertiary degree or diploma. The American qualification that entitles one to be called a Certified Financial Analyst (CFA) has become the stock-in-trade qualification for stockbrokers and fund managers of today. It is a demanding course that is highly respected and confers a qualification that is highly coveted.
You need to decide how well qualified your broker needs to be in relation to your objectives - qualifications do not automatically result in good people skills or a fantastic "bed-side manner".
Over the past five years, there have been significant changes to the accounting, legal and regulatory framework within which companies operate - these need to be understood. There are other important developments that affect the way analysts and investment managers value companies, including the new codes of corporate governance, accounting standards and sustainability reporting. Some of these developments are more important than others, but advisers need to be abreast of developments in order to offer advice of the highest standards.
The degree of qualification you require as a consumer will depend greatly on the service you require. If you have an execution-only account, you need your broker to be a good "dealer" with a detailed knowledge of the trading rules and settlement procedures, but probably little else. If you are looking for a discretionary fund manager, you will, typically, be looking for somebody with better qualifications and a wide breadth of knowledge of investment matters and a working knowledge of accounting, legal and tax issues.
Qualifications can provide a degree of comfort to investors, but they cannot guarantee good portfolio performance or management. Academically sound technicians are still subject to the vagaries of the markets and no qualification can turn investing into a predictable science. The one thing that qualifications certainly do achieve is to instil confidence in a client.
Long-term relationship
There is no guarantee that things will not go wrong - even with the best-laid plans. A long-term investment horizon will militate against disaster, but unfortunately all investments are accompanied by a degree of risk. A rogue trader managed to hoodwink the highly qualified team at Barings Bank and bring the ancient investment bank to its knees, in a case that has become infamous. In South Africa we have examples of stockbroking and other investment companies coming to grief, but our high standards of regulation and protection have limited the negative fallout and losses.
Just as there are enormous responsibilities placed on stockbrokers, and all South African financial advisers, there is also an enormous responsibility on you, the investor, to find a competent broker who suits your personal needs. This is going to be a long-term relationship of mutual respect and teamwork, so it is vital to choose carefully and stick to your long-term objectives. Do not be tempted to chop and change brokers in a frenzy of following the latest investment craze. This will only cost you money and upset your long-term financial planning and objectives. Set your course, choose a good broker and stick to your guns!
- David Sylvester is the chairman of the Shareholders' Association, telephone (021) 6867567.
This article was first published in Personal Finance magazine, 1st Quarter 2006. See what's in our latest issue