Investment Column: Trouble Brewin for stockbroker

The fortunes of the UK's myriad small stockbrokers are inevitably tied to the health of the equity markets that their business is focused on, so it is little surprise that after months of gloom, Brewin Dolphin is basking in some sunshine.

The fortunes of the UK's myriad small stockbrokers are inevitably tied to the health of the equity markets that their business is focused on, so it is little surprise that after months of gloom, Brewin Dolphin is basking in some sunshine.

Brewin, which mostly caters for comfortably off individuals through its national chain of advisory offices, said investors' renewed optimism had helped profits before tax and goodwill amortisation rise more than five-fold to £8.9m in the six months to 26 March, with a 28 per cent rise in turnover. Its share price was a ha'penny better yesterday at 74.5p.

While Brewin has been boosted by equity market conditions, the broker has also gone to considerable lengths to lick itself into shape to cope during the tougher times. Costs have been stripped out, and Brewin has built up its discretionary arm, where it can charge substantial fees for making investment decisions on behalf of its clients.

The company also dabbles in corporate broking, and has been able to take advantage of a surge in small and medium-sized companies seeking a stock market listing.

The one big drawback for prospective shareholders of Brewin is that it is among the firms being investigated by the Financial Services Authority over the collapse of the split-capital investment trust sector during the bear market.

As both a broker to several trusts and an adviser piling clients into certain split capital investments, Brewin may find itself in the firing line along with 20 other firms over allegations of mis-selling.

The financial impact of such a situation is very hard to quantify. Brewin has reserved more than £2m to cover possible claims and for legal costs, but that could turn out to be inadequate. The FSA's final rulings on splits could also be years rather than months away.

Based on a valuation of its various parts, Brewin is not expensive. However, it is hard to see how Brewin can shake off uncertainties over splits in the foreseeable future. Avoid.