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Investment view

At the first of our West Country roadshows, I received a question from an IFA that was once a regular feature whenever potential investors had the chance to quiz a stockbroker but which has hardly featured during recent years. Can we look after clients who do not wish to use our nominee service? Well, of course we can but anyone who still wishes to hold their investments in paper form has clearly not been paying attention to the way in which the world has changed.

You would have thought that the investment industry would have been at the cutting edge of technological development but the truth is we have been rather behind the curve when it comes to bringing our working practices into the 21st Century. Doing away with share certificates has taken longer to turn into a real issue. It was clear from last week&#39s question that to some people it still does not rate as an option to be considered.

There is now a serious cost issue associated with paper settlement. We all know how much easier it is to transfer title and ownership by electronic means. I know that the fact that shares have a real value will inhibit some people&#39s desire to relegate their investments to cyberspace but modern encryption techniques and the existence of watchdogs and regulatory bodies – along with the compensation schemes that are now present – should remove this worry from most people&#39s shoulders. Think about it. Would you really wish to take money out of the bank to purchase a house in cash? It is far easier to use the electronic means available. Yet it seems many people still worry that somehow, in handing over their paper certificate, they will lose real ownership of their investment.

At the nub of this particular issue is the business of settlement. Since the beginning of this year, UK equities have been traded using T+3 – settlement and delivery three days after the date of any trade. I suggest it is extremely difficult to meet a settlement deadline as tight as that using the traditional, paper-based method. Electronic transfer through Crest is the only way you can be reasonably certain to settle and deliver on time. Of course, you can always deal for a longer settlement period. But this usually involves receiving an inferior price. After all, you are really asking the counterparty to your transaction to lend you the value of the transaction for whatever period is needed to allow you to complete the deal. And do not underestimate how much more expensive it is to shuffle paper around. Many stockbrokers now charge a premium rate for dealing outside the Crest system. I see this is as a trend likely to extend into other financial assets as well. You have been warned.

Several years ago, I was asked to address a group of IFAs on the subject of technology in our industry. One IFA tackled me afterwards, saying he could not see why it would be so important to change his working practices. He had a card index system showing who his clients were and what investments they had. It had worked well up to now. Why change?

My suggestion was that providers would require him to make the move. They would be less willing to deal with somebody unable to connect through the internet. It could impinge on his ability to receive commission and even ultimately on the price that might be paid by his clients for the investments. I am not aware this is happening to any great extent yet but I cannot help feel it is the way of things in the future.

Meantime, the London Stock Exchange looks set to float on its own market and raise a little more cash. It will be eyeing the war chest accumulated by the Deutsche Borse, with whom it failed to merge. The future of exchanges are somewhat obscure these days but then this is the first fast moving world powered by technology. Don&#39t say I didn&#39t tell you.


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